With around 15 minutes of effort, you can set yourself up on a path to retire far more comfortably with regard to your finances than you would if you don't take this simple step. All you need to do to get started is to sign up to start contributing to your 401(k) or similar employer-sponsored retirement plan.
The beauty of those types of retirement plans is that once you get started, contributions typically continue automatically every paycheck until you shut them off, or stop working for your employer. That means once you make the effort a single time, you can potentially reap the benefits for the rest of your career -- and throughout your retirement as well.
The three things you need to know to get started
When you sign up to contribute to your employer-sponsored retirement plan, you generally need to tell the administrator three key pieces of information:
- How much you want to contribute.
- What you want your contributions to buy.
- Who your beneficiary will be should you pass away with money in the plan.
How much you want to contribute is usually either asked in terms of a percentage of your salary or in terms of a certain dollar amount per paycheck. In 2016 and 2017, you can contribute up to $18,000 per year if you're under age 50 or $24,000 per year if you're age 50 or up, though your limit may be smaller if you're considered a "highly compensated employee" at your job.
A good rule of thumb is to try to contribute at least as much as you need to maximize any match your employer offers so that you don't turn down that free money. If you're able to contribute more, then you'll simply help yourself build to either a faster or a more comfortable retirement. If you're not able to contribute even that much, start with what you can, and commit to increasing your contributions as you're able.
What you want your contributions to buy depends on how close you are to retiring, how comfortable you are with volatility, and how much more you need saved up to meet your retirement goals. In most plans, you'll have a choice between a handful of funds representing some combination of stocks, bonds, and cash. Whatever choices you make today, know that you can (and should) revisit your investment choices as your life situation and account value change over time.
Choose cash for money you'll need to spend right away. Choose short-term bonds for money you'll need to spend within the next few years -- or to preserve a portion of your wealth if you've reached your savings target well in advance of your expected retirement date.
You can also choose bonds for a portion of your longer-term savings if your fear of price volatility would keep you from a stock-heavy portfolio for those farther-away needs. Stocks and bonds frequently move in different directions, and if that trend continues, it would dampen the short-term swings in your portfolio that price shifts cause. Just be forewarned that in today's low-interest-rate environment, you'll likely have a lower overall long-term expected return from the bond portion of your portfolio.
For your longer-term money, stocks provide you a strong shot of delivering the decent long-term returns you'll need to turn what you're able to sock away today into what you'll need to cover your future costs. Just understand that while the stock market has been a great long-term wealth generator, the returns it offers come in fits and starts, and there are often multi-year periods of declines along the way. That's why money you need in the next few years does not belong in stocks, despite their long-term potential.
Who your beneficiary will be is an important decision to make when you first sign up -- and one worthy of reviewing as your life circumstances change. If you're married, your surviving spouse automatically will inherit your 401(k) unless you've named another beneficiary and your spouse signed a waiver. If you're single -- or if you've gotten the waiver signed by your spouse -- whomever you've named as your beneficiary will inherit your account, even if your will says something different.
Invest those 15 minutes now for a stronger retirement
When it comes to saving for your retirement, the more time you're actively contributing, the better your chances are of building a decent-sized nest egg. It'll likely take you around 15 minutes to fill out the electronic or paper forms to sign up and get started. By getting yourself on the path to automatic investing, those 15 minutes could very well be the most important quarter-hour of your financial life.
Chuck Saletta has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.