When it comes to saving for retirement, 401 (k) is a fantastic option. Not everyone has access to a 401 (k), but if your employer offers this type of account, it is wise to take advantage of it.
Contributing to a 401 (k) can help save you a lot of money for retirement, but it can be difficult to make sure you’re getting the most out of your account. With these five strategies, you can get every penny out of your 401 (k).
1. Earn your full employer
Matching contributions give 401 (k) a serious advantage over other retirement accounts like IRAs because it’s basically free money. For every dollar you contribute to your 401 (k) up to a certain limit, your employer will match it.
This can add up to thousands of dollars a year in free money from your employer. For example, if you make $ 60,000 per year and your employer will pay you up to 3% of your salary, that works out to $ 1,800 per year in free money. If you don’t already contribute enough to win the full game, you are leaving money on the table.
2. Maximize your contribution limits
Another advantage of 401 (k) is that it has higher contribution limits than many other accounts. For 2021, the maximum amount you can contribute to your 401 (k) is $ 19,500 per year (or $ 26,000 per year for those 50 or older). In comparison, IRAs have annual contribution limits of just $ 6,000 per year, or $ 7,000 per year for those 50 or older.
Not everyone can afford to maximize their 401 (k), but try to contribute as much as possible. The more you can save now, the better off you will be in retirement.
3. Set up automatic transfers
Because your 401 (k) is tied to your employer, many plans allow you to transfer a portion of each paycheck directly to your account.
By setting up direct deposit, it can be easier to keep your savings on track. This money goes straight to your 401 (k) without ever reaching your bank account, which can make it easier for you to save before you have a chance to spend it.
Plus, direct deposit can help build savings into your monthly budget. When you know that a certain amount of money is going to your 401 (k) each month, it’s easier to fit those savings into your budget rather than just investing the money you have left at the end. of the month.
4. Make sure you invest your money
Simply opening a 401 (k) account is just the first step in the process, and it’s important to make sure your money is actually being invested.
Investing in the stock market can be intimidating, but it is one of the best ways to build wealth throughout your life. If you put your money in your 401 (k) account without investing it, you are missing out on a valuable opportunity to grow your money.
It is also not as difficult as it may seem to start investing. When you open your account, you usually have a list of investment options to choose from. Most 401 (k) plans offer a variety of mutual funds or target date funds, which are hands-off investments. In other words, you don’t have to worry about picking stocks, buying or selling investments when you are contributing to your 401 (k).
5. See if you can reduce your costs
All retirement accounts charge a fee. However, some plans charge higher fees than others, and it’s worth seeing if you can lower those fees.
To see how much you’re paying, check your plan statements or talk to your plan administrator. The average 401 (k) charges a fee of about 1% of total assets under management, according to a study by the Center for American Progress. So, for example, if you have $ 100,000 in your 401 (k), you would pay $ 1,000 per year in fees.
Different investments may charge more or less, so consider whether switching to another fund within your 401 (k) might lower your fees. If you’re paying higher than average fees and can’t lower them, consider whether it might be worth switching to an IRA. Just make sure that you always contribute enough to your 401 (k) to earn your full employer, because that free money will outweigh any costs.
Your 401 (k) is a powerful tool for saving for retirement. By taking full advantage of it, you can get the most out of your money.