You might think, “Okay, I have a 401k — so I’ll just invest a certain percentage of my paycheck into it until I retire, and then I can live the life!” But many times, your 401k can come up short, leaving you with less than you’re expecting during retirement. So how can you avoid a low 401k balance? Follow these easy tips to maximize your savings in the long run.
1. Start now. To take full advantage of your 401k, you need to have a 401k. And there’s no time like the present. While some people may choose to wait to start a plan until they’ve met all the big bills — when their car is paid off or after they buy a house — the ideal time to start investing is when you’re young. The earlier you start, the more money you’ll have in the end. Even a year or two can make a big difference.
2. Don’t deduct money before you retire. It’s tempting to dip into the growing money pool that is your 401k, but it’s smart to take a hands-off approach. When you take money from your 401k before you retire, that money will be taxed. If you absolutely must — perhaps you have extremely high-interest credit card debt — then it may be a good idea, pending you don’t have anywhere else to turn. Just be cautious: You’ll have to repay the loan relatively quickly, usually within five years, or if you lost your job, within 60 days. Otherwise, you may incur early-withdrawal fees. Also, keep in mind that you won’t be allowed to add to your 401k when you’re repaying your loan, so essentially, your 401k savings is on hold until you’ve paid the money back.
3. Have your employer “match” your contributions. Many times, your employer will match a percentage of your 401k contributions — which is just as nice as it sounds: free money. Not only will you have more cash when you retire, there’s another perk involved:
“It means you can retire sooner than you otherwise might be able to do,” said Dennis De Stefano, a certified financial planner and CPA with De Stefano Wealth Management in Maui, Hawaii. “You might be able to enjoy a higher quality of living.”
4. Take advantage of rollovers. When you leave one job and enter another, you’ll have the option to take the money (which will be heavily taxed), leave the 401k to sit there or roll it over to your new job. It’s a good idea to roll it over, if your new job offers a 401k, so you can continue to build your savings. Just be sure to ask questions and follow all directions to avoid any hidden fees or penalties.
5. Watch out for fees. Using an investment option with high fees attached to it means your 401k balance may be significantly lowered over the course of your career.
“Some 401k investments have very high costs, and you should pick the lowest-cost investment in your 401k plan that also matches [your] risk tolerance,” says Carolyn McClanahan, a certified financial planner for Life Planning Partners in Jacksonville, Florida. “If it’s a high-cost 401k plan, then maybe consider saving in an IRA instead of the 401k after you get the match.”