If you’ve never received retirement benefits from work or have never thought about what you’re going to do when you retire, you may not know what a 401(k) is.
A 401(k) is simply an investment fund you contribute to for the duration of your working career and cash out on when you retire.
Some 401(k) funds are tax-free until you reach the age of 59 ½, and others require you to pay taxes for annual increases.
Each type has, as you may expect, its benefits and drawbacks. But we’ve got five tips to help you maximize your benefits from any 401(k).
1. Find the Right 401(k) Fund Type for You
First of all, determine the monetary amount you can contribute to your retirement fund. According to the IRS, if you’re under the age of 50, your annual contribution caps at $19,500. However, there is a “catch up” contribution of $6,500 for those over 50 years of age.
Determine how much of your annual salary you’re able to set aside for retirement. If you make enough to contribute the total amount, we recommend you do so, but in small amounts and during every pay period (more on that later).
Most 401(k)s are mutual funds with varying levels of risk. Some funds come with higher risk but the potential for significant, more exponential gains. Other funds are more conservative and grow slowly over a long period.
It’s vital to assess your risk tolerance or how well you can endure the risk of losing money. Taking a risk tolerance questionnaire can help you determine just how well you can handle loss while helping you know what type of fund to invest in.
Managing a mutual fund is challenging if you don’t know what you’re doing. Use your risk tolerance quiz results and your own retirement goals to help you decide where to begin.
Meeting with a financial professional to help you along the way won’t hurt either!
2. Save as Much as Possible Now
Saving money immediately for retirement is one of the best things you can do for your future self. If you haven’t started saving, start today.
With investment, the more you save now, the more you’ll have later. Investing in a 401(k) retirement plan works like a rolling snowball.
You start with a small chunk, and as it continues to roll, it picks up more snow. The larger it grows, the more snow it picks up. Imagine how big it will get if you contribute to it regularly!
Saving now also allows you to take calculated risks and provides you with financial security.
Combined with the benefit of having a nice retirement, there’s no reason not to save now.
3. Automate Increases to Future Savings
It’s natural to go on autopilot and forget about adjusting contributions to your 401(k) when you have a salary increase, when the market improves, or when you’re getting close to retirement.
Remember the snowball? You can automate your contributions to increase it when your snowball is more prominent, so you’ll yield even more growth.
You or your employer can set up automatic escalation. It can be as small and simple as an increase of 1% every year.
Increasing your contribution percentage every time your salary increases isn’t a bad idea either!
4. Don’t Cash Out Early
Sometimes life happens, and you need quick cash for emergency expenses. And, it’s tempting to dip into a retirement account for spare funds at times.
But to maximize your retirement benefits, you must avoid doing this.
You could take out a home equity loan or a personal loan to cover temporary emergency costs.
But remember: cashing out of your 401(k) will come with some downsides.
You’ll lose 20% of your entire fund to taxes if you cash out, and the IRS will penalize you 10% of your fund for an early/partial withdrawal. So if you have $100,000 in your retirement fund and choose to cash out early, you’ll be losing $30,000.
Many people cash out of their retirement plan every time they change jobs, and as you can see, this is costing them boatloads of money.
Your best option will always be to wait until your retirement to touch that money.
5. Maximize Your Employer’s Match
If you have an employer matching your 401(k) contributions, you must contribute every pay period. Most employers will offer 50 cents per dollar contributed, but some can offer up to a 100% match for the first 6% of your salary.
Set up automatic withholding, and be sure you’re okay with the withholding rate your employer offers you. If you want to add more than the default contribution (and you should), make sure your employer is aware of this.
When it comes to employer matching, the money you add to your 401(k) fund is yours. However, the money your employer adds through matching might not be yours until a set date.
This is better known as a vesting schedule. This encourages employees to stick around for longer and gives the employer the benefit of growing their own benefit fund.
Conclusion
Whether you’re a fledgling in your career or are coming to the end of it, these tips ensure you’ll be well taken care of at the end of the day.
The process of planning for retirement might sound complicated at first. But it really just boils down to contributing as much as you can to your fund regularly. And, of course, leaving it there until you’re ready to retire!
Author bio:
Adam Marshall is a freelance writer who specializes in all things apartment organization, real estate, and college advice. He currently works with The Kiley to help them with their online marketing.
