Planning for retirement is hard to fathom in your 20s and 30s. You are planning for a life that’s 30s years from now. Even thinking about life 10 or 15 years later is difficult to grasp.
The earlier you start, the more money you can compound over time, and making it fiscally easier to build a nest egg for yourself 30 years down the road.
Almost 80% of all American workers with full time jobs today can avail the 638,390 retirement plans that are in operation. Among these, the 401(k) plan is perhaps the most prominent.
The upside of the booming 401(k) plan is the fact that it gives you full control over your retirement savings. Or in other terms, you have the liberty to devise a plan that will make your money last 25 years or more. You get to decide how much to set aside and how much to invest.
With companies offering to match up to a certain percentage you set aside from your earning, joining the retirement plan becomes a no brainer. Why pass on free money?
Let’s say a company matches up to 3%. You earn $50,000 annually, and you decide to invest 3% of your earnings to your 401(k). That’s $1,500 annually. Then, the company will match your $1,500, and now you have $3,000 set aside for retirement that year.
$50,000 x 3% (0.03) = $1,500
Your Investment = $1,500
Company Investment = $1,500
Total Investment = $3,000
It would be a complete waste of a golden opportunity if you don’t know how to capitalize on your account. The following is a short list of four simple steps you could implement to maximize the reward of your 401(k) plan.
Put Money Into the Account
The benefits of signing up for a defined-contribution retirement plan are quite self explanatory. The money that you personally contribute will be derived from your salary and hence your tax bill is lowered. In addition to that, the money you set aside will increase in due time.
Plan to set aside enough 401(k) contributions to set off your employer’s maximum match which will eventually enhance your salary without cost. For your own good, try to put in as much money as you can afford.
Learn and Compare
You should be aware of the fact that there are two kinds of cost you face when running a 401(k) plan. One is the plan expenses that you cannot avoid and the other is the fund fees which are based on your choice of investments.
Compare the investment offerings in your 401(k) plan. You shouldn’t pay more than 0.25% annual fees if you select well run index funds. On the other hand, a comparatively economical actively managed fund could charge you a 1% annual fee.
Don’t Put All Your Eggs in the Same Basket
It is sensible to branch out your 401(k) account across several investment types. The advantage of diversification is that it allows you to gain returns from a mix of investments such as stocks, bonds, commodities and others.
Refuse to invest in the company stock as it narrows down your 401(k) account and increases risk. If you want to diversify, move your assets into a target-date fund which allows you to make periodic adjustments based on the market and how close you are to retirement.
Don’t be Tempted to Borrow
Do not make the mistake of borrowing against your 401(k) assets. Doing this invalidates the tax benefits of investing in a defined-benefit plan. You may also have to pay additional fees on the cash.
Don’t hesitate to sign up for the 401(k) plan as your employer and financial manager will most likely make the process much less complicated for you. Seek their help and expertise as often as you can. Also, be sure to study and plan ahead if you want to enjoy a happy life after retirement.