It’s 401(k) Day! Here are Some Tips to Get You on the Right Track
National 401(k) Day was created in 1996 by the Profit Sharing/401(k) Council of America to promote awareness of and contributions to 401(k)s.
Simply put, a 401(k) is a retirement savings account that is often offered through your employer. Each month you put aside a selected amount of money taken from your paycheck to invest in your account. As the years pass your savings account will grow and accumulate until you retire. All the money you accrue in your savings throughout your years of working will be what you use once you retire. Some advice, invest early and invest often. The more you save now, the more you’ll be able to do in retirement. Here are some tips to help grow your 401(k).
Join A 401(K) Plan and Decide How Much to Contribute
In order to grow your 401(k), you must first enroll in a plan. Look into what your company offers and work with your manager or HR officer to enroll. Decide how much you want to contribute. If your company matches a certain percentage of your contributions, contribute at least enough to get the full match. You don’t want to miss out on “free money” by not matching what your employer matches!
Increase Your Savings Every Year
Give yourself a raise! Increase your 401(k) contribution rate each year by 1%. While it may not seem like a lot, it adds up over time. An increase each year at 1% won’t feel like too much of a hit to your paycheck. If you can afford to increase more than 1%, that’s even better!
Let Compounding Work for You
The earlier you start saving the more you can take advantage of the power of compounding. What is compounding? The money you put into your retirement account is invested. The earnings of your investments are then reinvested back into your account. Your contributions plus your earnings makes for a larger amount of money! Essentially, compounding is producing earnings on your investment earnings.
Invest for Your Future
Consider different types of investments. Putting all of your money in one place can be a risky move. The market can be volatile at times so, for instance, a stock can drop in value unexpectedly. If all your money was invested in this particular stock you could be in some financial hardship. If you invest in several stocks, a loss in one might not hurt as much if you have gains in the others. By dividing your money among stocks, bonds, and cash alternatives you can spread your risk while conserving opportunities for gains.
Leave Your Money Alone
While borrowing money from yourself may seem like a good idea, it’s not! Money taken out of your account is money that can’t grow. Not only will your contributions not be earning a return on your investment, you may also have to pay taxes or penalties on certain types of withdrawals. The longer your money stays put the more you will gain.
Your Tax Break Perk
Your contributions to your 401(k) are on a pre-tax basis, meaning the money comes right from your paycheck before taxes are taken out. The benefit of this is that it lowers the amount of income you are taxed on. For as long as your money is in your account you will not pay anything in taxes. That is until you retire, unless you make a withdrawal before you turn 59 ½. If you withdraw money early, you’ll typically have to pay a 10% penalty on top of any taxes that are due.
While it’s never too late to start saving for retirement, an earlier start will give your money more time to benefit from compounding. Waiting too long to start saving, your money will have less time to grow. Delaying contribution increases can mean that you will have to put aside larger amounts later to reach your retirement savings goal. Be smart about your future and start saving now. Work with a professional if you need help getting yourself on the right retirement track.
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