Tips for a Successful 401(k) Savings Plan
Not so long ago, the company pension was king, and it was not at all unusual for workers to spend their entire working life at a single company, collecting a steady and reliable monthly pension as a reward. This secure arrangement is quickly becoming a thing of the past, and more and more workers are being asked to take an active role in planning for their own retirement.
The chief vehicle for this planning is the popular 401(k) plan. This employee driven plan asks workers to set aside a set percentage of their paycheck for retirement. The money is deducted from the employee’s earnings on a pretax basis, meaning that the money is not subject to taxation until it is withdrawn in retirement. The 401(k) is a powerful tool for retirement, but it is important to plan carefully to get the most out of this important benefit. Listed below are some of my favorite tips for making the most of your retirement savings.
Sign up today. If you are not currently participating in your company’s 401(k) plan, sign up at your earliest opportunity. Some employers require a waiting period before workers can participate in the 401(k) plan, while others allow employees to participate from their first day of employment. Find out what your company’s policies are and sign up as quickly as possible. The sooner you start saving the better your chances of accumulating a substantial nest egg.
Contribute enough to get the maximum company match. Perhaps the most attractive feature of the 401(k) plan is the company match. While not all company’s match their employee’s contributions, most do contribute at least something. Find out what your company’s matching policies are and contribute at least enough to garner the maximum match. For instance, if your employer matches the first 4% of contributions dollar for dollar, you would want to contribute at least 4%. Think of it this way – if you earn $30,000 per year, that 4% equals $1,200 per year. You would not turn down a $1,200 raise, so why would you turn down the $1,200 in free money your employer is offering through the 401(k) match.
Keep track of how your funds are invested. In general, younger workers should keep a higher percentage of their investments in the stock market than those closer to retirement. That is because over long periods of time the stock market has provided higher returns than other investments. As you near, retirement, however, it is important to scale back those stock market holdings to reduce your level of risk.
Borrow money from a 401(k) only as a last resort. While taking a loan from your 401(k) may seem like a good idea, that is seldom the case. When you remove money from a 401(k) prematurely, you lose out on the future earning power of that money, and even though you will be paying the money back you will lose out on the time that money would have been invested. It is important to thoroughly explore all other options before dipping into the 401(k).