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The Last 401(k) Guide You’ll Ever Need, Five Tips, Part 1

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Money Magazine is presenting a series of articles focusing on 401(k) accounts. The magazine’s five basic tips can easily be exapnded to cover all long-term investing. Here’s the first tip:

Save Early and Often

Suppose you started work in 1990 with a $40,000 salary. You saved just 2% of your pay but were such a brilliant investor that you put your 401(k) into top-returning funds every year. You would have finished 2005 with nearly $50,000 in your 401(k). Now suppose you… picked mediocre funds year after year, but you were frugal enough to save a full 6% of your salary. You’d hit 2005 with nearly $120,000. That’s right: more than twice as much as the brilliant saver.

There’s some number play in the magazine’s example, in which the authors neglect to mention the remaining 4 percentage point difference between the 2% and 6% saved. That 4% can also be invested outside of a 401(k), in which case, the “brilliant investor” scenario will undoubtedly beat the “mediocre funds” scenario.

But this isn’t what most people would, do, right? Once that extra 4% is in their paycheck rather than in their 401(k), it will get spent, or so the traditional thinking goes. In this case, the money is lost and the “mediocre” investor who defers 6% wins.

The article suggests increasing your 401(k) investment by 1 percentage point each year. I’ve erratically increased and decreased my 401(k) investment since I began working at my current company. When my rent was less than $350 and I was splitting my utilities expenses four ways, I was investing 12% of my salary. I probably could have done much more than that.

At the moment, 8% of my salary is invested directly in my 401(k).

Published or updated July 25, 2006. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about Luke Landes and follow him on Twitter. View all articles by .

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{ 1 comment… read it below or add one }

avatar Dus10

I currently put 5% into my 401(k). I just became eligible to contribute with my current employer. At my previous employer, I invested 4% into my 401(k). I get a great match, but I have maxed it out. I will not increase my 401(k) contributions until I max out all other options, including my Roth IRA, my wife’s Spousal Roth IRA, and educational savings accounts for my kids. At that point, I probably won’t care to save more for retirement in a true retirement account, as I could just as easily sock it away in a brokerage account, because earnings are basically tax deferred there, too, and it will help me to retire sooner, as I can withdrawal funds at any time. I am going Roth all the way, though, as I don’t want tax deferred in retirement funds, because you pay income tax rates on these funds, rather than capital gains rates.

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