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Dear Asking for a Friend,
I just got a new job and it has a six-month waiting period before I can sign up for the 401(k). What should I be doing in the meantime to stay on track with saving for retirement? And what should I look at within my workplace's plan to be smart about eventually using it?
Hoping to Retire
Dear Hoping to Retire,
Props to you for being this engaged and proactive! The future version of yourself is going to be delighted. Here are a few things to consider during your six-month wait.
Is this your first job out of college or are you already toting around a well endowed 401(k)? There are three main options for a preexisting 401(k): Leave it, roll it into an IRA, or roll it into the new 401(k).
Your six-month waiting period may also apply to a 401(k) roll over, which means rolling it to an IRA is likely your best bet. Personally, I'm not a fan of leaving it behind, because it could be forgotten. Why not just move it into an IRA that could possibly offer better investments at a cheaper price?
No roll over? Then you can just open an IRA to invest what would normally be going into your 401(k) and get the tax advantage.
The fact that you're asking this question makes me think you're probably going to contribute more than enough to at least get your employer match on the 401(k). Maybe you'll even be on track to hit the 2020 maximum employee contribution of $19,500.
But if putting $1,625 per month to max out your 401(k) isn't feasible, that's OK! You just want to ensure you're contributing enough to at least take advantage of the full employer match. That's the minimum goal.
Video by Ian Wolsten
Once you do the math on how much of each paycheck will be going into your 401(k), you can simulate the 401(k) experience during the waiting period. If you set up an IRA, either for a rollover or just because, then you should invest the money there. If not, then just put the money towards another savings or investing goal.
Another thing you can do during this six month holding pattern is look at all the investments available to you in your new plan. Build your portfolio now so you're ready to go as soon as it's available to you.
A huge part of picking any investment is understanding the associated fees. 401(k) plans can harbor all sorts of money sucking fees if you don't pay attention. Analysis done for CNBC found the average plan cost users 0.45% of assets under management — meaning a $45 fee for every $10,000 invested. While that amount might sound low, it could cost you hundreds to thousands of dollars each year. It's money you're paying in fees that could otherwise be growing and compounding for future you to use. An administrative fee isn't something you can avoid or negotiate down. It's part of being in the plan.
You want to focus in on the expense ratio for any index, mutual, or exchange-traded funds. Mutual funds, which are actively managed by a human, usually come with a higher expense ratio than its passively managed index fund and ETF counterparts. You should be able to find fee information in the annual report for your 401(k) plan or ask the 401(k) administrator directly.
It's taking six months for you to even be eligible to contribute to your employer's 401(k) plan, but do you know how long you have to stay in order to walk away with all the money in your 401(k)? A vesting schedule is the period of time it takes before you can leave the company and take all your employer's contributions. You can always take the money you contribute.
Vesting schedules are either immediate, graded, or cliff. Immediate is obviously the best because you can leave tomorrow and take it all. Graded means a percentage vests each year, often something like 20% in year one, 40% in year 2, 60% in year 3, and so on until you're fully vested. For example, if you left after the second year, you'd get 40% of your employer's contributions. Finally, cliff means nothing vests until a certain amount of time as passed, usually around five years, and then it all vests.
You can't change the vesting schedule, but it's good to know what you're working with and how long you need to stay at this job in order to get maximum benefits.
Now go get that money!
Erin Lowry is the bestselling author of "Broke Millennial: Stop Scraping By and Get Your Financial Life Together" and "Broke Millennial Takes on Investing: A Beginner's Guide to Leveling Up Your Money." You can follow her on Instagram @BrokeMillennialBlog or Twitter @BrokeMillennial.
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