Retirement has become an especially stressful issue for the millions of Americans who are facing unemployment or reductions in their employee benefits. More than ever before, you will need to be strategic in how you save for retirement to make sure you can maximize your income during those years and maintain a comfortable standard of living.
One of the key tools that you have at your disposal when it comes to saving for retirement is an employer-sponsored 401(k) plan. With a 401(k), you save pre-tax income and then allow it to grow tax free over time. Though you will need to pay taxes on it when you withdraw it upon retirement, presumably, you will be in a lower tax bracket at that point.
For many savers, maximizing the 401(k) is the first step in saving for retirement. Some key points to keep in mind when it comes to making the most of a 401(k) include the following:
1. Maximize any sort of employer match.
Many employers offer a match through the 401(k) plan. Think about the match as free money. Your employer provides this money with no strings attached, so it is recommended to capitalize on the match as much as possible. Often, the match is an easy way to double the amount of money going toward retirement.
You may choose to continue contributing to a 401(k) beyond the matched amount, but taking advantage of this feature should be considered the bare minimum. Once the employee match has been optimized, you have a range of different options. If the 401(k) involves high fees or other drawbacks, it could make sense to open an individual retirement account (IRA) or a similar savings vehicle. However, in most situations, taking full advantage of an employer match should be the priority.
2. Make contributions a percentage of your salary.
For the most part, employees can contribute to their 401(k) savings plans in a variety of different ways. Most companies will let employees set contributions as either a specific dollar amount or a percentage of their overall salary.
Typically, you should only choose a specific dollar amount if the number saved is at the maximum allowable contribution. Otherwise, choosing a percentage makes the most sense. The reason why you want to choose a percentage is that contributions will automatically increase whenever you get a raise. This allows you to ensure that contributions go up over time without you having to be actively involved in the process. Often, people who choose a set amount forget to increase their contribution as they start to earn more money. Unfortunately, this can mean saving considerably less than was originally intended, which can really cut into total savings over time.
3. Create automatically escalating contributions.
While setting contributions as a percentage of your salary is a way to ensure they increase over time, you can also choose to automate the increase. Even with a percentage-based contribution, this strategy makes sense. Early on in your career, you may have little extra money to put toward retirement. As you continue to advance in your career and earn more, however, you can put more toward savings. Many companies allow employees to escalate contributions automatically for this reason.
The plan allows you to set a target contribution for the future and then create step increases in time to get there. The steps help ensure that you continue to save more as you make additional money. The escalation amount can always be changed if something unexpected happens, but automating the increases takes much of the guesswork out of saving.
4. Revisit your 401(k) strategy at least annually.
In some ways, the automated nature of a 401(k) makes it a great way to save for retirement. You may not even think about the money that is removed from each paycheck for the account.
However, investing in a 401(k) needs to involve some degree of intentionality. Ideally, you will review your savings at least annually to assess and make necessary changes. You may find that you can save more money or that you need to adjust your investment strategy. Other times, you may need to scale back if your hours have been reduced or you decide to take time off work for an extended period.
During the review, you should also think about where you are concerning your larger goals and retirement date. This review takes only a matter of minutes, and it can help you from straying too far from your intended goals.
5. Consider low-cost index funds.
When investing in a 401(k), you need to choose where you want your money to go. For many people, this decision is stressful since it means balancing risk with opportunity for growth.
One strategy for people without a lot of investing experience is purchasing broad-based index fund shares, which can grow your nest egg considerably over time without exposing you to undue risk. This approach is easy and low maintenance. Also, the cost can be very low provided that you look into the fees associated with different options and choose the best for your needs. The returns on these types of investments often resemble that of the larger market with built-in diversification, which makes growth fairly automated. As you get closer to retirement, you may want to start considering options that are lower in risk.