Not all employers offer a 401(k) plan, so consider yourself fortunate if this is an option at your place of employment. Retirement planning is crucial to ensure you have income later in life. To help you plan, your job may deduct a percentage of your income and deposit funds into your retirement account. This provides an effortless way to save for the future.
Here are six ways to make the most of your 401(k) plan.
1. Enroll early
If you’re fresh out of college and young, you might decline joining your employer’s 401(k) plan at this time. In your mind, you have plenty of time to think about retirement planning. But nevertheless, the earlier you start planning the better. You may not realize it now, but planning for retirement as early as your 20s tremendously increases your nest egg, ensuring you have plenty of income when you’re ready to leave the workforce.
2. Contribute enough to qualify for the match program
Depending on the financial health of your employer, the company might offer a 401(k) match program — they’ll match however much you put into the account. The rules for the match program vary. Some companies require employees to contribute a certain percentage to qualify for the match, and some companies only match contributions up to a certain percentage. A match program is free money, so you’ll want to take advantage of this provision. If your employer requires a 3% contribution to qualify for the match, make sure you’re putting at least this percentage into your 401(k).
3. Increase contributions by 1% a year
Initially, your income may not allow high contributions. If you have to start with 1% or 2% of your income, do so. But make a point of gradually increasing your contributions by 1% every year (or every other year) until you reach the max contribution allowed by your employer.
4. Don’t tap your account
A 401(k) account can grow to a sizable amount in just a few short years. And you might be tempted to take a withdrawal, especially if retirement is far off in the future. However, taking money from your 401(k) plan reduces earning potential. If you have to take an early withdrawal due to hardships, make sure you repay your account as soon as possible to avoid paying taxes on the withdrawal.
5. Read your statements
Your employer is responsible for deducting contributions from your check and depositing this money into your 401(k) account. Still, you need to check your statements carefully to make sure your employer contributes the right amount. To illustrate the importance of regular monitoring, my friend’s employer stopped their match program, but didn’t tell the employees. It was five months before one of the employees noticed the change after reviewing his statement, and he brought it to the attention of the other employees.
6. Roll your money into an individual retirement account
If you quit your job or become self-employed, don’t ignore retirement planning. Roll the money in your 401(k) plan into an individual retirement account and continue making regular contributions.
Opening a 401(k) is one of the easiest, most convenient ways to save for retirement. Since your employer deducts the money directly from your paycheck, you won’t miss the money and if offers an effortless strategy for retirement planning.