Serious A 401K plan early in life and I need advice

[Captain Squee]

So I can do 1 of two things. I can put my money into a normal pension plan which is guaranteed to gain me 2% interest, or I can have them invest said money into the stock market (stocks of my choice) to get a higher risk, but if successful, higher gain, running the risk of some loss.

I'm 18 years old and currently have no bills, so I can afford any size pension amount. I get just over 1K a month with only 1 tax claim working a full time job, 5 days a week, 40 hours a week at 8 USD an hour. I'm allowed to split my money between the high risk and the guaranteed rates to whatever ratio I so please. What do those experienced and educated voices say to suggest for someone like me?

Feel free to ask more questions to get a feel for my situation.

 

[Tucker]

Ok, by just reading the first paragraph, I'd say go for the normal plan. (I take no risks when it comes to money, especially in this economy.)

I couldn't read the second paragraph because I couldn't help staring at that horrifying sig...

 

[CassinoChips]

I'm allowed to split my money between the high risk and the guaranteed rates to whatever ratio I so please.

As crazy as the stock market is right now, I'd say split it 50/50. If/when things pick back up, you might be able to play with that ratio a little bit, and be a bit more aggressive with thing, but I don't think that would be a good idea right now.

 

[nomad]

Go with a normal plan. High-risk pension investments are for when you're older.

 

[coffeecup]

So I can do 1 of two things. I can put my money into a normal pension plan which is guaranteed to gain me 2% interest, or I can have them invest said money into the stock market (stocks of my choice) to get a higher risk, but if successful, higher gain, running the risk of some loss.

I'm 18 years old and currently have no bills, so I can afford any size pension amount. I get just over 1K a month with only 1 tax claim working a full time job, 5 days a week, 40 hours a week at 8 USD a week. I'm allowed to split my money between the high risk and the guaranteed rates to whatever ratio I so please. What do those experienced and educated voices say to suggest for someone like me?

Feel free to ask more questions to get a feel for my situation.

1) 2% blows. That's worse than a US T-bill. Also since inflation is around 2% (avg), you're just leaving your cash in a static position. So you're basically putting your cash in a box where it will lose no value and opt to take it out when you're like 65. That's not a really good investment for anyone.

2) You're young. The general standard is high-risk young, low-risk old. The reasoning is based on financial need and responsibility. When you're young you do not have to care for anyone, you are flexible in terms of where you can live, your health is more resilient than when you're older, and most importantly, you do not need any financial buffer in the future. (You don't even have any bills man!) So from this factor, you'd want more high-risk investment (i.e., stocks) rather than investment in a CD or bond, or 2% interest (which is EXTREMELY low btw). So if you reaaally want to invest it would be on the order of 80 (high) - 20 (low). Hell I would go 100 (high) given your income and financial position and the shitty 2% alternative. (But remember, "investing in the stock market" means actual "investment." This does not mean just throwing your money into a blue chip stock.).

3) The penalty fee. The problem with a pension plan is that there's a high fee for taking your funds from the plan. And given that you're young, it's very likely that you might fall back on these funds in the near future. You don't have any bills now, but once you do and start pulling funds from the plan, you're gonna get knocked with at 15% fee (well it depends) each time.

My Recommendation
If it's possible, I would place 0% of your funds in a pension plan. Given your age, financial position, and employment status at the moment, I would simply use your extra savings for a meaningful investment TODAY. More specifically, I would save up for EDUCATION. If you're earning 1k a month with NO bills, then work for a couple of years then head off to a university. And if you study and volunteer for two years, you're bound to end up in a decent university as well. Then the potential $8/year you earn + savings accumulated will pale in comparison to your new earning power. Invest in a mutual fund during that period if you really want to combat inflation or something (but a savings account works fine if it's just going to sink in education expenses in two years). But to save for retirement when you're 18? have no kids? have no bills? have no responsibilities? and earning $8/hour? That's a bit odd imo.

 

[nomad]

Yeah, pension at $8/hr is pretty funny. It's a good sign that you care about investing money at 18, though. Even if you're not making a load of interest off of your savings, setting aside money for the future is a great idea. However, I'm going to agree that you should seek a college degree. You'll have a much better time making a load of money if you make that investment. I'm close to $50,000 in debt at the moment, but I'm paying off loans really fast, saving money on the side, and I have more than enough to live a very comfortable life in NYC. All because I went to college.

 

[Contra Fates]

As crazy as the stock market is right now, I'd say split it 50/50. If/when things pick back up, you might be able to play with that ratio a little bit, and be a bit more aggressive with thing, but I don't think that would be a good idea right now.

^This. As someone who has been investing in the stock market for years, as well as someone with a 401K plan, I'd say that the above advice is the best advice. The rule when it comes to risks and possible gains is to not put all your eggs in one basket - but to put none in that basket at all would be silly. 2% is an absolute joke when it comes to gains.

That being said, it is wise to put a fair share of your money into a safe place - because the market is a very volatile place. So, splitting it down the middle will end up as the best bet - because you'll get to try your hand at playing the risks, while still having half of your money safely tucked away and accruing a small amount of interest.

All that set aside - kudos on investing in your future at such a young age! Usually people at this age are too busy blowing all the cash they make right away instead of saving - or better, investing it. Good luck with it!

 

[blakstang98]

Go with a normal plan. High-risk pension investments are for when you're older.

This is the exact opposite of what you want. You always go aggressive early in your life because you'll be working for many more years. Then when you're within the last 5 years, you ramp it down to any changes are low and you plateau to retirement. My boss is actually suffering from having an aggressive rate late in his career. Then when he was ready to retire, he forgot he had it going aggressive and lost a bunch of money from the stock market crash. As a result, he's still working and trying to get it back to where it was before the stock market crash.

So yeah, go aggressive early. You don't have much to lose now and stand to gain quite a bit.

 

[Captain Squee]

1) 2% blows. That's worse than a US T-bill. Also since inflation is around 2% (avg), you're just leaving your cash in a static position. So you're basically putting your cash in a box where it will lose no value and opt to take it out when you're like 65. That's not a really good investment for anyone.

2) You're young. The general standard is high-risk young, low-risk old. The reasoning is based on financial need and responsibility. When you're young you do not have to care for anyone, you are flexible in terms of where you can live, your health is more resilient than when you're older, and most importantly, you do not need any financial buffer in the future. (You don't even have any bills man!) So from this factor, you'd want more high-risk investment (i.e., stocks) rather than investment in a CD or bond, or 2% interest (which is EXTREMELY low btw). So if you reaaally want to invest it would be on the order of 80 (high) - 20 (low). Hell I would go 100 (high) given your income and financial position and the shitty 2% alternative. (But remember, "investing in the stock market" means actual "investment." This does not mean just throwing your money into a blue chip stock.).

3) The penalty fee. The problem with a pension plan is that there's a high fee for taking your funds from the plan. And given that you're young, it's very likely that you might fall back on these funds in the near future. You don't have any bills now, but once you do and start pulling funds from the plan, you're gonna get knocked with at 15% fee (well it depends) each time.

My Recommendation
If it's possible, I would place 0% of your funds in a pension plan. Given your age, financial position, and employment status at the moment, I would simply use your extra savings for a meaningful investment TODAY. More specifically, I would save up for EDUCATION. If you're earning 1k a month with NO bills, then work for a couple of years then head off to a university. And if you study and volunteer for two years, you're bound to end up in a decent university as well. Then the potential $8/year you earn + savings accumulated will pale in comparison to your new earning power. Invest in a mutual fund during that period if you really want to combat inflation or something (but a savings account works fine if it's just going to sink in education expenses in two years). But to save for retirement when you're 18? have no kids? have no bills? have no responsibilities? and earning $8/hour? That's a bit odd imo.

8$ an hour for a first job being there only 2 months is a great starting wage for a trainee. In fact, finding a trainee position. It wouldn't matter if I went to college or not for my employment status, my wages could never be better for a trainee here in NY state. I can find an apartment with all utilities paid for for around 600 a month once I get solid transportation. Once I figure my car insurance rates, I can just make a few more claims so long as I don't reach the point that I owe money come tax time. Food bill is completely affordable if I get the cheap stuff, which I was raised on anyway. I can live off 8$ an hour and come the 6 month point I'm guaranteed a pay raise. It is also possible for me to get the pay raise sooner provided I work well enough.

I never plan on investing in more education. I have my reasons but that's for a different, more rant worthy, and much angrier thread. Bottom line is, more education is not something I'd be looking into. You fill in the blanks with life experiences.