Employer-sponsored 401k investing programs are now the main way to save for retirement. But, how can you make sure you're using the right strategy?
Read on for ways to maximize your retirement savings.
1. Start a 401k as Soon as Possible
The earlier you can start investing in a 401k program, the better off you'll be. Time is on your side and so is compounding interest.
Simple interest accumulates based on a percentage of the principle. But, compounding interest accumulates based on the principal plus all the previous interest. Basically, you gain interest on interest.
So, the earlier you can start investing the more time you'll have to build compound interest. It can grow your investments exponentially.
2. Contribute as Much as You Can Afford
Compound interest is the intersection of time and money, so it's in your best interest to contribute as much money as you can.
If you can afford it, 10% of your annual income is an ideal goal. If that's too much, do what is affordable, but every bit helps.
But, don't let your contribution rate put a strain on the rest of your finances. If you have looming loans or credit card debt, your 401k savings aren't something to lose sleep over.
It's fine to invest a minimum amount, as long as you can contribute enough money to qualify for the full employer match. This brings us to our next point.
3. Take Advantage of 401k Employer Matching
Employer match is a benefit offered by most companies with 401k programs. If you contribute a certain amount to your retirement, your employer may also contribute (or match) money based on that amount.
For example, if your company offers a 100% match of up to 3% of your salary, you should plan to put at least 3% of your income into your 401k. Just by contributing the minimum, you'll be doubling the size of your retirement fund.
A 401k matching program is a major part of your employee benefit package, just like company health insurance. Not taking advantage of a matching program is like giving a portion of your paycheck back to your boss.
4. Learn the Details of Your Employer's Vesting Schedule
While 401k employer match is a great opportunity to grow your retirement fund, it does come with a caveat. Your employer's contributions don't automatically belong to you. But, your own 401k contributions will always be 100% yours.
Each 401k plan has a vesting schedule, which refers to the number of employment years it takes to own the employer's contributions. It's important to know how vested you are, especially if you quit your job or are let go.
If you are fully vested immediately, you will own all the money in your 401k. Only some company’s offer this though. In most companies, you'll have to stay a number of years to be 100% vested.
5. Don't Withdraw Too Soon
The earliest you can take money from your 401k without penalty at age 59.5. But if you're still working, you might not be able to withdraw from your current company's 401k. It depends on your plan.
If you take money out of a 401k before age 59.5, you'll have to pay a 10% penalty tax. You'll also have to pay the income tax on it. Withdrawing money too early will only drain your hard-earned savings, so it's best to wait.
6. Allocate Your Investments Based on Your Risk Tolerance
Risk tolerance is the amount of investing risk you are willing to handle.
It's important to diversify your portfolio, so if the market changes you won't lose all of your money overnight. Your money should be allocated across a mixture of asset classes.
There is no guarantee that a diversified portfolio or asset allocation will enhance overall returns or outperform a non-diversified portfolio. Diversification and asset allocation do not protect against market risk.
Your risk tolerance also depends on your age. As you get closer to retirement, you won't have the time to recover from a loss like a younger investor would.
7. Rebalance Your Portfolio
Portfolio rebalancing is the process of adjusting your 401k investments.
Once a year you should rebalance your 401k portfolio which might mean selling some high weighted investments and buying some of the underweighted portions in your portfolio. The thought here is to keep it in balance with your risk tolerance.
**Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss.**
If you want to simplify your investments, a target date fund might be a good alternative. These funds are automatically rebalanced and become more conservative in nature the closer they get to there chosen date. The target date is the approximate date when investors plan to start withdrawing their money.
**Principle value of these funds are not guaranteed at any time, including at the target date. and the funds objective is subject to change over time as the fund rebalances itself in attempts to become more conservative.**
8. Increase Your Contributions Over Time
As your salary increases throughout your career, your contributions should increase too. If you get a raise, you should increase your contribution rate. This is a great way to grow your retirement fund and live within your means.
For reference, the max contribution is $19,000 in 2019. But if you're over 50, you can contribute up to $25,000 in a year.
9. Have a Retirement Investment Goal in Mind
Meeting a goal is practically impossible if you haven't set one. A retirement calculator is a great way to estimate how much money you'll need.
With a goal in mind, you'll know if your investments are on track. That way you can adjust your strategy and prevent major disappointments when you retire.
A Financial Advisor Can Guide Your Investment Strategy
Investing for retirement can be overwhelming. But with careful planning, education, and these tips, your nest egg could support your golden years.
If you're still feeling lost, a financial advisor can help. If you are searching for financial guidance on your investments, schedule a free consultation today.
**Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee or future results. All indices are unmanaged and may not be invested into directly.**