Is there anything better than free money? I don’t think so, either. Since we all know money doesn’t grow on trees and can be difficult to accumulate over time, you’re probably wondering how you could come across such a wonderful thing, right?
The answer could be as simple as putting a little bit of each paycheck toward a retirement fund, such as a 401(k). If it’s as easy as that, why do so few people take advantage of maximizing their 401(k)?
Well, as someone who graduated from college in 2011, I understand saving money can be difficult. Many people have student loans they have to begin paying off soon after graduation. Others have a difficult time finding a job, while the ones that find jobs may not make enough money to put toward retirement. Also, as someone who’s only 25, isn’t it a little early to think about retiring?
The answer is a resounding “NO!” The earlier you start saving, the better off you’ll be in the long run. The difference between beginning to save money in your mid 20s compared to your mid 40s could cost you a whole lot of dough.
You have two options here: You can wait to start saving or you can start putting a little bit away at a time. When you think of your retirement years, do you want to be forced to find work or do as you please? Besides working the occasional part-time job or volunteering, I’d bet most of us would prefer to spend their retirement relaxing and enjoying life as opposed to continuing to work just to support yourself. To avoid the latter, below is a list of steps for you to follow to help maximize your 401(k).
Contribute, contribute, contribute
I can’t stress this enough. As obvious as it sounds, many eligible employees don’t participate in their 401(k) plans. Is it really that hard to get the application from your company’s Human Resources Department? I didn’t think so. Fill out the paperwork and start contributing today!
Still not convinced? What if I told you the money you contribute comes out of your paycheck before taxes are taken out? It’s true!
Decide on a rate
New employees may be automatically signed up for a retirement account, depending on the company. When this happens, 3% is the most common amount contributed to the 401 (k). However, by only putting 3% of your salary toward your 401(k), you may not be contributing enough to live the lifestyle you want. According to U.S. News, you should save an additional 1% whenever you receive a raise. The goal is to eventually get to the point where you’re saving 20% of your pay.
Take advantage of employer match
This is the free money I referenced earlier. If your employer matches a portion of your contributions, it’s essential to put in the required amount to get the full benefit. This is also why it’s so imperative to start saving at an early age. If you don’t believe me, here’s all you need to know: According to Forbes, if you begin saving $75 twice a month at the age of 25, and the money grows at a 10% rate, you’ll have $876,000 saved up by the time you reach 65. On the other hand, if you wait until 45 to begin saving the same amount, you’ll only have $113,000 saved up. The time difference will cost you nearly three quarters of a million dollars!
Don’t touch it! You shouldn’t treat this as a secondary savings account that you can dip into to help pay your mortgage or car payment. Until you are 59 ½, you’ll end up paying huge penalties if you decide to take money out of your 401(k). If for some reason you MUST withdraw money early, you’ll end up paying somewhere close to a 10% fee in addition to any income tax that is applicable. The general rule is to leave the account alone, aside from making contributions.
Ok, maybe there’s ONE exception. If you switch jobs, this is the time to do something with the money. However, instead of cashing out, transfer it to an Individual Retirement Account (IRA). From there, you’ll need to decide if you want to a Roth or traditional IRA.
“Pick the lowest-cost investment in your 401(k) plan that also matches your risk tolerance,” recommends Carolyn McClanahan, a certified financial planner for Life Planning Partners in Jacksonville, Fla. If you invest in options with higher fees, you won’t be able to save up nearly as much over the course of your career.
Now do you understand what I’m talking about when I refer to free money? It’s out there and available! It’s up to you to take advantage of it.
Does anyone have any other tips for maximizing your 401(k)? Let us know in the comments section below!