The future of Social Security is precarious to say the least and an ominous threat to Americans who made no personal retirement plans on their own. But it’s never too late to begin investing in your own future. One of the most effective tools to insure the you have the money you need for your retirement years is by enrolling in a 401(k) plan. But before you rush to enroll in a plan, take the time to examine your options so that you choose a plan that best meets your needs.
Begin by direct depositing a modest amount of 2-3% of each paycheck. By having it direct-deposited into the plan, you won’t be tempted to spend it elsewhere and after a short time forget the paycheck cut. When you can manage a bigger deduction from your paycheck, increase the percentage being invested into your 401(k) to ensure adequate savings to maintain your current lifestyle in retirement.
Employee Plans
The advantages are many for people who sign on to an employment program. The biggest reward for investing through your employer is that many offer an employee-matching program where a percentage of your contributions will be matched by the company. Failing to take advantage of an employee-matching program is like throwing free money away.
Another perk of enrolling in an employer sponsored program is the access you will have to advice from your personnel department. Employees whose job was to chose the plan particulars will be the most knowledgeable and will be able to explain the funds and packages, along with the fine print and terms of the plan.
Tips for Choosing a Plan
Diversification is the key to all successful investment portfolios. The same goes for your 401(k) package. If there are too many similar funds, too many owned by the same company and little diversity, your investment is at risk of failing to perform at the rate you were planning for an adequate retirement fund. Many companies offer a choice of packages to their employees with varying degrees of risk. Your decision will be based on whether you can afford to gamble for the higher growth or need to play it safe at a slower growth rate. Your investment advisor or personnel department will be able to help you determine which plan is which.
Tips for Monitoring Your Plan
To make the most of your investment, your 401(k) needs to be monitored; you are ultimately your own financial planner when it comes to your retirement portfolio. While it’s true that how well your plan performs is largely dependent on the financial market, diligent oversight can help maintain growth. Read everything you can get your hands on, including blogs and investment journals; watch investment programs and online videos to become familiar with the vocabulary of investing.
Thoroughly read every quarterly statement. Compare the fund performances over several years to comparable ones on a rating website like Morningstar. Learn what companies own your plan funds and check out the top rated mutual funds to help determine the companies you’d most want to include in your portfolio. Examine your options and find out how you can make changes to your plan for better performance and greater diversification.
If your employee sponsored fund becomes out dated or you’re unhappy with the performance, it’s time to speak to your employee resource department about making some changes. Ask your employer to evaluate whether the investments in your plan are appropriate, and if they have or can suggest educational resources to help you make these critical investment decisions. Find out when they last conducted an investment policy review and ask for the minutes from those meetings.
Earn the Employee Match
The quickest and most painless way of boosting the value of your 401(k) is by optimizing your investment to meet the maximum annual tax-free limit (2012 limits: $17k; $22.5k for Americans over age 55) and earn the maximum employer match. Meet the goal every paycheck for the employer’s matching investment and annually for the tax break and you’ll see your retirement fund grow faster.
Stay with It
According to the Bureau of Labor Statistics, the average Americans has fourteen jobs by the age of 40, most when we’re teenagers. If you have multiple opportunities to establish a retirement account, avoid cashing in an account to start a new one. Always transfer your investment to avoid paying penalties and income tax on the withdrawal. The key to building a large retirement nest egg is to keep the compound interest coming and that can only happen if you stick with it.
About the Author: Noreen Ruth is a regular contributor to a variety of financial-related blogs and websites. She specializes in credit and debt-related issues and enjoys educating consumers about the latest rules and regulations, as well as ways to build, improve and maintain good credit. Click here to compare a wide selection of credit card offers, or see a complete list of low APR credit cards at WowCreditCards.com.
FAQs
Before beginning a plan document, however, you will need to decide on the type of 401(k) plan that is best for you - a traditional 401(k), a safe harbor 401(k), or a SIMPLE 401(k) plan. A traditional 401(k) plan offers the maximum flexibility of the three types of plans.
When should you start a 401(k) plan? ›
When you're in your 20s, if you've paid down any high-interest debt, try to save as much as you can into your 401(k) and other retirement accounts. The earlier you start, the better.
How to invest in a 401k for beginners? ›
If you don't know how to invest through your 401(k), here are six tips to get you started.
- Understand what a 401(k) is. ...
- Determine how much you can contribute. ...
- Calculate your risk tolerance. ...
- Pick your investments. ...
- Go with the simplest option. ...
- Scale up contributions over time.
While retiring on $400,000 is possible, you may need to adjust your lifestyle expectations if this is your final retirement amount. If you want to retire early, $400,000 might be a difficult number to make stretch.
What do I need to know before taking money out of my 401k? ›
Early withdrawals from an IRA or 401(k) account can be expensive. Generally, if you take a distribution from an IRA or 401(k) before age 59½, you will likely owe: Federal income tax (taxed at your marginal tax rate). 10% penalty on the amount that you withdraw.
How much will a 401k grow in 20 years? ›
As a very basic example, if you had $5,000 in your 401(k) today, and it grew at an average rate of 5% per year, it would be worth $10,441 in 20 years—more than double. If you withdraw those funds early, however, you're not only facing a stiff tax penalty, you're losing all of that additional growth.
Is 25 too late for 401k? ›
Starting retirement savings when you are in your mid- to late 20s and early 30s will help you use the power of compounding. Retirement savings accounts like 401(k)s and individual retirement accounts (IRAs) provide tax benefits that can help you save more.
How does a 401k work for dummies? ›
Basically, you put money into the 401(k) where it can be invested and potentially grow tax free over time. In most cases, you choose how much money you want to contribute to your 401(k) based on a percentage of your income. Your employer automatically withholds a portion of each paycheck and puts it into the account.
Can you start a 401k without a job? ›
401(k) plans are employer-sponsored plans, meaning only an employer (including self-employed people) can establish one. If you don't have your own organization (business or nonprofit) and you don't have a job, you may want to evaluate contributing to an IRA instead.
What is the safest investment for 401k? ›
Lower-risk investment types can help maintain the value of your 401(k), but it is important to consider that lower risk usually means lower returns. Bond funds, money market funds, index funds, stable value funds, and target-date funds are lower-risk options for your 401(k).
While $1,500 might not be enough for non-housing retirement expenses for many people, it doesn't mean it's impossible to stick to this or other amounts, such as if you're already retired and don't have the ability to increase your budget.
What is a good 401k balance by age? ›
However, the general rule of thumb, according to Fidelity Investments, is that you should aim to save at least the equivalent of your salary by age 30, three times your salary by age 40, six times by age 50, eight times by 60 and 10 times by 67.
What is the 4% rule in retirement? ›
What does the 4% rule do? It's intended to make sure you have a safe retirement withdrawal rate and don't outlive your savings in your final years. By pulling out only 4% of your total funds and allowing the rest of your investments to continue to grow, you can budget a safe withdrawal rate for 30 years or more.
How do I avoid 20% tax on my 401k withdrawal? ›
Plan before you retire
- Convert to a Roth 401(k) ...
- Consider a direct rollover when you change jobs. ...
- Avoid early withdrawals. ...
- Plan a mix of retirement income. ...
- Hardship withdrawals. ...
- 'Substantially equal periodic payments' ...
- Divorce. ...
- Disability or terminal illness.
If you have a high-interest debt, such as from a credit card with a big balance, you may get a much lower interest rate on a 401(k) loan. If you have upcoming debt payments and no other alternatives for paying them, borrowing from your 401(k) can reduce fees and penalties.
At what age is 401k withdrawal tax free? ›
401(k) withdrawals after age 59½
Once you reach 59½, you can take distributions from your 401(k) plan without being subject to the 10% penalty. However, that doesn't mean there are no consequences. All withdrawals from your 401(k), even those taken after age 59½, are subject to ordinary income taxes.
What age should you get a 401k? ›
Once you are at least 21 years or older and have worked for the company for at least one year, the employer is obligated to allow you to participate in its 401(k) plan.
Should I start a 401k in my 20s? ›
Starting early and contributing to a 401(k) in your 20s is crucial for long-term financial security. Aim to save at least 15% of your pretax income for retirement. Take advantage of employer matching contributions to maximize your savings.
Is 30 too old to start a 401k? ›
It's never too late to start saving money for your retirement. Starting at age 35 means you have 30 years to save for retirement, which will have a substantial compounding effect, particularly in tax-sheltered retirement vehicles.
Is it better to start 401k early? ›
Your 401(k) should be a long-term investment. It's typically the time in the market that matters most, not the perfect entry point. It's never too early to set up a 401(k)—but there's no real benefit in maximizing your contribution as quickly as possible when offered an employer match.
