This is a collaborative post by Ellie Jo with tips for your 401k.
Most Americans rely on a 401k to give them a happy retirement free of money worries. But for many of us, a 401k can be confusing and we’re never sure if we’re making the best of it that we could, if we’re thinking about it much at all.
It’s easy to get more out of a 401k with some simple money know-how and some financial research and understanding. Here are the essential tips and tricks for your 401k so you’re set up for your retirement.
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401K Tips and Tricks
What Is A 401k?
A 401k plan is a retirement account offered by many employers to their employees. Workers can make contributions to their 401k accounts through automatic payroll withholding, and the employer can match some or all of those contributions. The investment earnings in these plans aren’t taxed until the money is withdrawn, usually after retirement. You can withdraw money early from these plans, but the aim is to save for your retirement, with contributions from both you and your employer.
Start Your Contributions Early
It is never too early to start saving for your retirement in a 401k plan. It’s also never too late to start either. Whatever age you start paying in, you can build a reasonable amount of savings for you to live on in later life. However, to build up as much as you can, it’s best to start as early as you can. The earlier you start saving, the more money you will be able to contribute, giving more to live on when you retire. If you haven’t started yet, don’t panic. Just start now, as the longer you wait, the less you will be able to contribute.
Maximize Employer Contributions
Most 401k plans offer an employer match. This means that if you make contributions to your 401k, then your employer may make matching contributions, up to a maximum amount. As a rule of thumb, you should contribute enough, at least, to get to the match. Don’t miss out on the money your employer is willing to put in.
Employers will make these contributions in a couple of different ways. Find out how your company manages theirs, and do your research to find out whether you’re better off maxing out your 401k or not. Make sure you’re getting the most contributions from your employer that you can to maximize the amount of money you can cash out when you retire. It would be foolish to miss out on their contributions and not get the money that they are willing to put in for you. If you are able to afford it consider maxing out your 401k.
Pick The Best Savings Rates
401k savings rates aren’t a one size fits all solution. The best amount to save in your plan is the amount you can afford to contribute without damaging your day to day finances.
Make sure that however much you’re putting in, that you’re not paying in so much that you’re neglecting paying off your credit cards or can’t afford basics like the rent. Try to make sure that you’re making a large enough contribution to get any matching contributions that your employer offers.
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Assess Your Risk Tolerance
Many investors make the same mistake with their 401k plan, which is failing to work out which mutual fund is the best choice for them. Some investors don’t take enough of a risk, which means that your savings in your 401k will grow too slowly. Some investors make the opposite mistake and invest aggressively at first, then panic when the market declines and decide to sell their mutual funds.
To work out the best balance of risk and return for you, you can complete a risk tolerance questionnaire, which will give you a risk profile, and suggest mutual fund types that will suit you.
Diversify Your Portfolio
If you’re building a portfolio of mutual funds, it’s very important to diversify your portfolio, as this spreads your risk across different investment types. Most plans for a 401k will offer several options for mutual funds in different categories. If you’re not sure what the best option for you is, it could be wise to speak to a financial advisor to help you understand the choices that you are making.
Increase The Savings Rate
If you get a pay rise at work, raise the amount that you pay into your 401k. You can still enjoy the extra money from a promotion or a higher paying job, but you can also boost the amount going into your plan. When the time comes to retire, you’ll be grateful that you did this, as you’ll have more savings waiting for you.
Don’t Make Premature Withdrawals
Some 401k plans have an offer for hardship withdrawal, or a loan option which would allow you to take some money out of your plan before retirement, within certain limitations. Withdrawing money early will come with a withdrawal penalty and any loan you take out from the 401k will have to be paid back, with interest. If you have taken this kind of loan and then lose or change your job, the loan balance will need to be satisfied before you terminate your employment.
Withdrawing early can be very tempting, but don’t do an early withdrawel. It’s your own future that you will be taking from, and you’ll end up with a smaller pot of savings for your retirement. Instead, if you are really in need of money, leave your 401k alone and look into other methods of borrowing money, like a traditional loan or borrowing from family.
If you’re money savvy, you need to have your 401k plan in good order. By taking it seriously now, you can provide for yourself comfortably in later life, and won’t have to go without once you retire. Start saving for retirement as early as you can, pay in as much as you can and learn about investments and the risk and returns of investing to help you maximize the money you will have available to you later on. Plan for your future and make the most of your 401k for a comfortable retirement.
Greg is a Chartered Financial Analyst (CFA) with 22+ years experience in Financial Services. He has held numerous FINRA Securities licenses (series 7, 63, 65, and 66), and is an expert on Investment Products and Financial Planning. Greg has 22+ years experience as a real estate investor and degrees in Psychology and Philosophy.
Greg has been quoted/interviewed in Yahoo Money, Yahoo Finance, USA Today, Authority Magazine, Realtor.com, Business Insider, and others.
Greg is an avid runner, and the father to identical twin girls and their awesome brother. His love of budgeting and his kids led him to join The Great Resignation in 2021.
Disclaimer: Any Financial Tips on ChaChingQueen are general and informational. Speak with a professional about your specific situation.