Stupid 401k question

[greyscience5]

I graduated college about 3 years ago and am 25 years old. I have been contributing 8% of my salary to my 401k and I get a 12% match (so 20% of my salary). The problem is that I left all of my money in the money market of the 401k plan and am wondering if this was a dumb move. I am mostly trying to figure out what would be better to do in the future. I just never saw a point in putting money into stocks for the short term that I plan on rolling into an IRA once I leave anyway.

[cronewitch]

Money in a money market is save from market risk but is a sure way for long term risk of inflation eating your money. If you were to put 20% of your income in a money market for 5 years you would think you had a year of salary saved but with low rates and raising salary you would have less. If you put in for 50 years you won't have even 10 years of salary saved.

You need to take market risk or you won't be able to ever save enough to retire. Even if you only keep your job a few years it will have to be invested not just stored to get started. When you change jobs you will have part or all of the employer match vested and roll what you have to a traditional IRA. Your odds are better of it being more if invested the next few years. Make sure you understand the vesting schedule before changing jobs.

[happytraveler]

At 25 years of age, I would suggest putting about 75% of your 401(k) assets in equities. A reasonable rule of thumb is to take 100 minus your age, and use that figure as what you should have in equities. (Your own circumstances may dictate a higher or lower exposure to equities.) With regard to changing jobs, your asset allocation makes no real difference---you will just be moving money form one 401(k) custodian to another if you change jobs--so I would not let your future plans of where you will be working impact your investment choices. Good luck.

[Deleted]

Jan 9, 2011 3:15:57 GMT -5 cronewitch said:

Money in a money market is save from market risk but is a sure way for long term risk of inflation eating your money. If you were to put 20% of your income in a money market for 5 years you would think you had a year of salary saved but with low rates and raising salary you would have less. If you put in for 50 years you won't have even 10 years of salary saved.

You need to take market risk or you won't be able to ever save enough to retire. Even if you only keep your job a few years it will have to be invested not just stored to get started. When you change jobs you will have part or all of the employer match vested and roll what you have to a traditional IRA. Your odds are better of it being more if invested the next few years. Make sure you understand the vesting schedule before changing jobs.

What she said! ;D

At your age you need to take risk to see your money grow. The only thing you should have in a money market is your emergency fund or money you might be saving for the purchase of a house.

[Deleted]

What kinds of funds do you have in your 401K? Do you have a target date fund? Btw, that is an amazing match, I wish I worked there.

[phil5185]

I just never saw a point in putting money into stocks for the short term that I plan on rolling into an IRA once I leave anyway.

What a great opportunity - 20% of your salary going into an investment at age 25. But you are incorrectly analyzing the time horizon. That money is committed for 34.5 years (age 59 1/2), it doesn't matter if it is in a 401k or an IRA, the tax status is the same.

Just to give you an idea - you have a degree so I'll use a $50,000 salary, ie, a $10k/yr investment. At 11%/yr that will be $3,400,000 at 59 1/2. But as the others say - you cannot grow wealth in a savings account, they are designed for shortterm storage of money - you need to invest the money into growth products.

The SP500 Index grew 10.68%/yr for the most recent 34 1/2 yrs, ending 11/2010. It returned 15.1% for 2010.
politicalcalculations.blogspot.com/2006/12/sp-500-at-your-fingertips.html

[The J]

Jan 9, 2011 2:15:23 GMT -5 greyscience5 said:

I graduated college about 3 years ago and am 25 years old. I have been contributing 8% of my salary to my 401k and I get a 12% match (so 20% of my salary). The problem is that I left all of my money in the money market of the 401k plan and am wondering if this was a dumb move. I am mostly trying to figure out what would be better to do in the future. I just never saw a point in putting money into stocks for the short term that I plan on rolling into an IRA once I leave anyway.

That's not what people mean when they say short term. Short term refers to you planning on using the money soon for something. Rolling it into an IRA just changes the account -- you can immediately reinvest it. Since the money is earmarked for retirement, you're looking at a long time before you use it.

[Opti]

You may want to find out what the vesting rules are in regards to your 401K and any rules regarding termination, i.e. what happens and what you
are allowed to do in regards to your 401K if you quit or are laid off. That
may guide your decision making on how to invest the 401K now.

[dudleydoright]

"I have been contributing 8% of my salary to my 401k and I get a 12% match (so 20% of my salary)."

You have a unique opportunity at a very early age to grow a retirement fund really fast. Take as much advantage of it as you can afford.
And just out of curiousity..what industry/company are you in that has a 12% match?