How to Optimize Your 401(k) for a Effortless Retirement
You can use a 401(k) plan, one of the best vehicles for retirement savings. But are you taking full advantage? Many workers just sign up for an employer’s plan and never think about it again. But there are some clever strategies you can use to help bolster your nest egg.
Step 1: Contribute Enough to Get the Full Company Match
Most employers match 401(k) contributions, which means they add money to your retirement savings based on what you contribute. If your employer matches 100% of your contribution up to 5% of your salary, and you earn $60,000 per year, that’s $3,000 you should be contributing at a minimum. Your company will then match that, putting in another $3,000 and instantly doubling your money.
Not contributing enough to get the full match is like leaving free money on the table. If you’re not sure of your company policy, check with your HR department.
The player in Step 2: make annual increases in contributions
If you’re early in your career, you may not be able to set aside a high percentage of your salary. That’s okay! The secret is to gradually boost your contributions. Now, many 401(k) plans include automatic annual increases, which takes the guess work out of it and will ensure that as your salary grows, your savings do too.
A solid target to aim for is to put away 15-20% of your salary, but even a few percentage points will go a long way in the long term.
Step 3: Select Appropriate Investments
A 401(k) isn’t a savings account — it’s an investment account. That means the cash you put in will increase some by the way it’s invested. 401(k) plans typically include a range of investment choices, such as:
Target-Date Funds: These automatically adjust your investments based on your expected retirement date. The closer you are to retiring, they become more conservative.
Index Funds: These are designed to follow a broad market index (like the S&P 500) and are generally low-cost.
Stocks vs. Bonds: Younger investors can afford to be speculative and buy stocks, while older investors may wish to move more toward bonds.
Getting the correct mix of investments can make a difference in your returns.
Step Four: Don`t Take a Distribution Early
One of the worst things you can do is take money out of your 401(k) before you retire. Not only will you owe taxes, but you also will be subject to a 10 percent penalty for taking money out before age 59½.
Rather, consider your 401(k) to be money you aren’t allowed to access until retirement. If you find yourself in need of an emergency fund, create a savings account just for unexpected expenses.
Step 5: Keep an Eye on Fees
Not all 401(k) plans are the same. Others have exorbitant management fees that nick your returns. You may not be able to influence which plan your employer selects, but you can pick lower-cost investments within the plan.
Compare expense ratios, and if you have an expensive slate of 401(k) options, take up an IRA in order to save on retirement accounts.
Step 6: Make Catch-Up Contributions
If you’re age 50 or older, you can add more to your 401(k). The regular contribution limit for 2024 is $23,000, but people 50 and older may deposit an additional $7,500, for a total of $30,500.
If you are starting late, this is a good way to enhance savings.
Final Thoughts
A well-managed 401(k) plan can be the linchpin of your retirement plan. Contribute to get the full employer match, increase your savings each year, invest wisely and avoid early withdrawals, and you’ll be in good shape for a secure retirement.
It’s important: Retirement savings is a marathon, not a sprint. Begin early, remain disciplined, and allow compound interest to do the heavy lifting.
If you do this, your future self will thank you! Are you ready to take the next step in your retirement journey? Look into starting an IRA or deeper investments to help build your financial future.