1. Save As Much As Possible Today
It’s wise to exceed the default savings rates used by many plans that automatically enroll new employees. Most financial planners agree that you should save 10% to 20% of your total income earned annually throughout your working life to maintain the same standard of living during retirement. This approach increases the likelihood of accumulating enough savings to achieve your income goals during retirement.
2. Maximize Employer Match
If your employer offers a matching contributions program, make sure to take full advantage of this free money that bolsters your retirement savings. For example, an employer may offer a 5% match, meaning they will contribute 5% of your salary as long as you also contribute 5%. The percentages can vary depending on the plan, but you must contribute to be eligible for the match.
3. Consider Current Tax Rate and Future Taxes
Pre-tax contributions to 401(k) plans offer immediate tax benefits. In other words, your contributions reduce your taxable income before taxes are deducted from your paycheck. You can estimate the tax savings you will achieve as a result of pre-tax contributions using tools like a pre-tax savings calculator. Additionally, your money is invested over the years and grows on a tax-deferred basis. Typically, interest earned or returns on investments in a taxable account are taxed every year. With a 401(k) account, your contributions and earnings on investments are not taxed until you withdraw them during retirement.
4. Make Your Savings Automatic
By setting your salary contributions to automatic mode, money will be deducted from your paycheck and invested at each pay period. Automating your savings can help you budget for your retirement. Moreover, with a fixed percentage of your salary allocated to your 401(k), you will contribute more money as your salary increases over the years.
5. Choose the Right Investment Mix for Your Situation
For many retirement investors, selecting a portfolio can be challenging. Choosing the right asset allocation model requires matching your comfort level with risk as an investor to your investment timeframe. Many retirement plans now offer target-date funds or fixed asset allocation funds to help participants diversify their investments across multiple asset classes (such as stocks, bonds/fixed income, real estate, and alternative investments).
6. Avoid Early Withdrawals
It may be tempting to make an early withdrawal, but the long-term consequences are often not worth it. The withdrawal rules for 401(k) can be complex, although there are certain situations where penalties can be avoided. However, if you leave your employer or face financial hardships, it is generally advisable to avoid withdrawing early from your 401(k) account.
7. Use 401(k) Loans as a Last Resort
Some features of 401(k) loans include no credit checks and competitive interest rates. They can be a potential source of funds, but it is usually wise to avoid borrowing from your 401(k). There is an opportunity cost, as you may miss out on market gains while paying yourself interest.
Next Steps: Create a Retirement Action Plan
It’s important to have a clear vision of why you are saving for retirement in the first place to fully benefit from your 401(k). We all have a unique definition of the word “retirement.” If you want to ensure you’re making the smartest choices with your 401(k), take some time to assess your goals and review how many of the seven steps mentioned above you have already implemented. Please consult a financial advisor or retirement planning expert to help you devise a strategy to achieve your financial goals.
Questions
Frequently Asked Questions (FAQs)
How can I maximize my 401(k) account?
Try to save as much as possible, perhaps 10% of your annual income. Consider the tax benefits as traditional 401(k) accounts offer pre-tax contributions, providing an immediate tax benefit, but withdrawals are taxed.
What are some ways to manage a 401(k) account?
Consider your risk tolerance and the asset allocation you are comfortable with, such as stocks versus bonds. If your employer matches your contributions to your 401(k), make sure to enroll as it is free money added to your retirement savings. Also, a contribution rate increase program that aligns with your salary increase can help boost the growth of your savings.
Source: https://www.thebalancemoney.com/ways-to-maximize-your-401k-2894190
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