You’ve done well for yourself.
Your firm pays great and offers a robust benefits package, including the all-important 401(k). If you’re like most lawyers, though, personal finance is not necessarily your forte, and you don’t remember anyone covering how to make investment elections in law school. So how can you be sure you’re making the right choices?
Rest assured that you are absolutely capable of making a few basic choices to nicely set up your 401(k), even if you don’t know much about investing. Later, you can meet with a financial professional to learn more and get more specific recommendations if you need to.
Where to Start
First, you may have to decide between a Roth 401(k) and a Traditional 401(k). Each situation is different, but for most people, the Traditional 401(k) is the way to go. Contributions to a Traditional 401(k) are made pre-tax, and you pay no taxes on the money until you withdraw it. This will relieve some of your current tax burden, which can be significant during your working years. Contributions to a Roth 401(k) are made after-tax, and you’ll pay no further taxes on it when you withdraw it once you retire.
You will then need to decide what percentage of your salary you would like to contribute. Keep in mind that you should contribute a healthy amount, as most lawyers are starting their saving later than their non-lawyer peers, and need to make up for lost time. At the absolute least, make sure you are contributing enough to take full advantage of any company match offered by your employer. (But really, contribute much more than that; most employers only match up to 6%. Seriously—contribute much more.)
How to Pick Investments
Most plans will allow you to choose target-date funds, and that choice is the easiest one for most savers. Instead of having to figure out how to make a bunch of different investment choices, a target-date fund has the right combination of assets based on when you plan to retire. You choose the fund that corresponds with the year you turn 60, or 65, or whatever…and that’s it. You don’t have to become an investment expert overnight or adjust anything. All the work is done for you.
Now, if you want to skip the target-date fund and choose your own options, you absolutely can—just be careful. Remember to take fees into consideration, diversify (make sure your portfolio includes a mix of both stocks and bonds), and determine the level of risk that will work for you.
Just Do It
Don’t wait to start investing for retirement; you’re most likely already starting a bit later than everyone else. Don’t let your nervousness about not being a personal finance expert stop you from letting your money work for your future.
Log into your benefits account and review the 401(k) section. Set up your 401(k) contributions or, if you’re enrolled already, review your investment elections to make sure they’re still right for you.