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Debbie writes in:

I鈥檒l do my best.

What is a 401(k) plan?聽A 401(k) plan is just a very simple way for people to save for their retirement. Almost all of the time, a 401(k) plan is offered by a company to their employees, which is why you were encouraged to sign up for it during your employee orientation.

After you sign up, you鈥檒l agree to put aside some percentage of your paycheck for this plan. Think of it as being a special kind of savings account, and the money you set aside goes into that account.

So, let鈥檚 say you鈥檙e going to make $26,000 a year, and you get paid every two weeks. That means your聽grosspay 鈥� the amount you鈥檙e going to make聽before聽taxes are taken out 鈥� would be $1,000 per paycheck.

The percentage that you agree to take out of your check comes out of that聽gross聽amount. So, if you鈥檙e going to put 5% into your 401(k), $50 from each check will be put into your 401(k) account.

Then, your taxes will be figured based on $950 per paycheck, not $1,000 per paycheck.聽That means you鈥檒l actually be paying less income tax than you would if you were contributing nothing to your 401(k).聽You鈥檒l be contributing $50 per month, but your paycheck would actually go down by less than $50.

驰辞耻听do聽end up paying taxes on the money, but you don鈥檛 do it until money comes聽out聽of the 401(k), usually at retirement age.

How much should you be contributing? I would suggest a minimum of 10%, regardless of age. If you鈥檙e over 35, make it 15%. If you鈥檙e over 50, make it 20%.

What about employer matching?聽Some employers offer matching contributions to their employee鈥檚 401(k) accounts. Essentially, these contributions act as free money in your 401(k).

Let鈥檚 say your employer matches half of your contributions up to 10%. In the above example, you鈥檇 be contributing $50 per paycheck to your 401(k) and your employer will put in $25 on top of that. This makes your 401(k) contributions even more valuable.

What about all the investment options?聽When you put money into your 401(k) account, that money will need to be channeled into one of the investment options offered by your employer鈥檚 401(k) program. The options vary greatly from company to company, too, which can add to the challenge.

Let鈥檚 make this clear right off the bat:聽don鈥檛 worry about picking the 鈥渂est鈥� investment.聽Making contributions and putting them in any investment option is going to be better than not making any contributions at all.

If you鈥檙e not sure which one to pick, there are a few simple guidelines I suggest.

First, choose a 鈥渢arget retirement鈥� plan if they鈥檙e available. You鈥檒l be able to choose among several target retirement plans. These plans are usually distinguished by different years 鈥� Target Retirement 2045 and so on 鈥� so choose the one that comes closest to the year that you鈥檒l turn 67.

If that鈥檚 not available, subtract your age from 70, then double that number. So, in Debbie鈥檚 case, she鈥檇 take 70 minus 28, which is 42, and then she鈥檇 double it, to get 84. Contribute that percentage to stocks. If there are different stock options available, ask the person in charge of your plan for the option with the most diversification. Then, contribute the聽rest聽to bonds 鈥� again, if there are different bond options, ask for the one with the most diversification. You鈥檒l want to readjust your plan every year or two, because the closer you get to retirement, the more you鈥檙e going to want in bonds and the less you鈥檙e going to want in stocks.

This should cover the basics. A 401(k) plan is simply a way to make sure you have money set aside for聽you聽in retirement. In some places, your employer will contribute extra. If you鈥檙e not sure which investment option to take, choose a target retirement fund 鈥� and if that鈥檚 not available, follow a really simple formula. Do those things and you鈥檒l be set up for retirement.