Basic 401K Tips
1. Contribute enough to get full employer match.
Many employers will match your 401k contribution up to a certain percentage – usually capped around 6%.Essentially, this is free money that you will benefit from come retirement. In order to qualify for the match, you must contribute a certain amount yourself. Yes, this might mean your paycheck is slightly smaller each month but the money comes from pre-tax dollars so there should not be a huge discrepancy. It’s better to give more now in order to have more later.
2. Utilize automatic increases.
Many will agree that your 401k contributions should equal to 15% of your annual income. (Remember, that percentage will vary depending on how early or late you begin saving in your career.) If you’re just starting out in your career, 15% can be a lot to contribute, especially when you have the burden of student loans and other big expenses. Therefore, start out around 7-10% but increase your contribution by a percent each year then on. You can set up for these increases to happen automatically at the beginning of the new year. That little extra money taken from your pay will hardly be missed but overtime will add significant value to your retirement savings.
3. Invest in stocks while you can.
Your 401k is made up of stocks and bonds, and while bonds are considered the “safe” option, stocks have historically proven a better return. Those who are just starting out have at least 30 years before they retire, therefore, they can be more risky with their investments because the stocks will have time to recover from any market fluctuations. As you mature in your career, it makes sense to slowly alter your investment portfolio to more bonds than stocks. Some plans actually offer this option, called a Target Date Funds, which will automatically invest your retirement savings appropriately according to your age, i.e. more stocks while you’re young and more bonds as you near retirement.
4. Know your vesting date.
Millennials are known for being job hoppers – staying an average of 2 years at a job. While companies are aware of this fact they are taking steps to prevent it from occurring so valuable time and resources are not wasted on their end as well as the employees. A 401k vesting period was established in order to encourage employees to stay with a company. Basically, an employee must work at a company, for a set number of years, in order to earn their employer match contributions to their 401k. While the employees’ contributions are untouched, the potential loss of the match can be devastating to their retirement savings.
5. Roll over, do not withdraw.
If you do leave your job, for whatever reason, before you retire, do not withdraw your 401k! When you withdraw from your 401k before age 59 ½, you are subject to not only income tax but also a 10% penalty. Instead, roll it over into an IRA or your new company’s 401k plan. You even have an option to keep it with your previous company and let the funds grow; you just can no longer contribute to it.
These are just a few tips to keep in mind when setting up, nurturing and growing your 401k. Make sure to consult your financial advisor and plan administrator for more in depth analysis and preparation.