in an employer-sponsored retirement plan is one of the easiest ways to save for
Many people don't think about how much they should be contributing, or they don't pay attention to how fluctuating markets can affect their portfolio. If you're serious about building your nest egg, there are lots of ways to be smarter about how you add money to your 401(k).
Here are some tips you'll want to follow when enrolling in a 401(k) or other employer-sponsored retirement plan.
The first thing you need to do is contribute, period - especially if your company offers a match. If you don't, you're literally turning down free money. The most common employer-sponsored plan is a 401(k), in which pre-tax money is deducted from each paycheck based on a percentage you choose, with an annual max of $17,500. If you're lucky, your employer may "match" with its own contribution (typically topped off at 6%). Did we mention that it's free money?
If you work for a public education organization, non-profit, or hospital organization, then your retirement plan consists of a 403(b). As with a 401(k), the money is deducted from your paycheck before taxes. Government employees have similar options under a 457(b) plan.
2. Be sure to contribute enough.
Contributing a default percentage (on average 3%) simply isn't enough. A bump in your contribution percentage could mean thousands of dollars in retirement income down the road. And while not everyone can afford to max out his or her contributions, you should at least put in enough to get the full match offered by your employer. Put that money to use.
3. Roll over your plan from your previous job.
With all the excitement of getting a new job, it's easy to forget (or dread) rolling over your old retirement plan into a new one. But failing to do so could cost you. If left untouched, the funds you've invested in could eventually change or turn into cash by default. Once you're eligible to join your company's retirement plan, it's a good idea to roll over your funds to your new account or open up an IRA account. An IRA account comes with the same tax-deferred benefits as 401(k), 403(b), and 457(b) accounts, with lower administrative costs and a wider range of funds to invest in. Talk to a financial adviser to figure out what's best for you.
4. Increase your contribution over time.
Early in your career, it's common for your initial contributions to start off low. But as you advance in your career and earn more income, your contributions should take the same trajectory. A 1% to 2% increase each year could make the difference between having enough for retirement and coming up short.
5. Be mindful of your portfolio.
Stocks and bonds fluctuate, a lot. "Setting it and forgetting it" isn't a viable savings strategy. Even if you have target-date funds, it's important that you re-evaluate your portfolio periodically - either by yourself or with the help of a financial adviser - to make sure that it reflects changes in the market and that you're not holding onto depreciating funds or missing out on potential gains.
6. Wait until retirement to cash out.
While this seems like an obvious piece of advice, a lot of people look at their 401(k) as a reserve fund. It's far better to resist the temptation of touching those funds, and think about saving for the long haul. If not, you can expect to be taxed at your current income tax bracket, as well as pay a 10% penalty fee. Emergencies are bound to happen, but withdrawing funds from your retirement savings account should be an absolute last resort.
7. Resist the temptation to borrow from your plan.
Borrowing against your account is far better than cashing out early, but you still face numerous risks. For example, if you have an outstanding loan and quit your job, in many cases you could be forced to pay the loan back immediately. Many accounts don't allow you to continue making contributions while you're paying off an outstanding loan, which means not only are you unable to grow your retirement, but the amount you've borrowed no longer has the potential to grow, either.