February 4, 2010
We have covered the first question for plan participants: How much? How much should you contribute, how much will keep you comfortable in retirement, how much can you afford today? If you decide what you can afford and that's your contribution, it's a perfectly reasonable approach (but don't forget this rule when deciding). But once you have decided that a contribution of $5 or $50 or $500 per paycheck is the right amount, you have an important step to take.
Convert that dollar amount to a percentage. If your gross pay in an average period is, say, $1000, then a contribution of $50 should be noted as 5%. There is on the surface no difference, but what about when you get a raise or bonus? What if you work overtime? Your pay rises but your contribution does not, unless you use a percentage. The flip side is also true: if you earn less in a period, a percentage-based contribution will be smaller, so your net pay will not be reduced out of proportion. But there is also a life issue that might not seem obvious. You have a life to live, a job, family obligations; stuff to do. Let's face it: once you get your 401(k) or 403(b) set up, making changes will just not land very high up on your "to do" list. Sometimes years can slip by before you get around to a review (that can be good). But if your income grows and your contribution does not, you'll fall behind in seeing your account grow to where you need it to be. So set up your contribution as a percentage and you can get back to enjoying life. Or, if you're like me, enduring what's left of winter.
Tomorrow, the most important of my ten rules: Ground Rule #1: Give Yourself a Raise
GTC
(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author's opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).