When it comes to saving for retirement, it seems that every generation has their fair share of trouble. Whether you’re a baby boomer, member of Gen X or a millennial, chances are you or someone you know is faced with the dilemma of not having adequately saved for retirement.
Determining how much money you’ll need to retire is one of the most important aspects of your retirement planning strategy. Even if you find that you’re a little off track, there are steps you can take to help ramp up your retirement accounts.
Here are five tips that you can implement today to begin growing your 401(k) faster.
It’s almost sad to say, but for many people, the first step in maximizing their retirement savings is simply to participate. According to a recent study released by the Schwartz Center for Economic Policy Analysis at the New School, 68% of working-age Americans (age 25 – 64) did not contribute to an employer-sponsored plan.
401(k) plans are among the best retirement-building tools an employee can have. And although a small percentage of those included in that statistic aren’t given the option to participate, these numbers reflect a high number of people who simply do not participate, even if their employer offers the option of establishing a plan.
Even if you have to start with a small amount, that seemingly insignificant action is far better than inaction.
Try your best to max out your 401(k). Although most participants don’t start out of the gate with the maximum contribution to their retirement accounts, it’s important to set a goal to increase your contributions every year until you reach the maximum contribution.
And this likely won’t be as difficult as you think.
The current limits are $18,000 and an additional $6,000 for a total of $24,000 if you are over 50. If we assume that you will receive an annual pay raise on average of 3%, a 1% increase year-over-year to your 401(k) contributions should have you maxed out in no time.
Investing more trumps investing better, so do your best to contribute as much to your 401(k) as possible.
Take advantage of the company match
Do your best to get the full company match as this is essentially free money that will compound over time along with your own contributions. But first, make sure that you understand the company match rules so you can take full advantage of them.
Initially, it might be difficult to decide on the percentage of your salary that you should contribute, but you should always invest as much as you can afford, and no less than the amount required to take advantage of the full company match.
It’s hard to imagine a scenario where turning down free money is a good idea, but if you fail to contribute to your 401(k) plan up to the amount your employer matches, that is essentially what you are doing.
Ensure you are properly allocated
Make sure that you are diversified and have the right mix of investments in your 401(k) for your age, time horizon, and goals. Many 401(k) providers have tools to help you do this, but if you still have questions, you should consider hiring an hourly financial planner to help you.
As an example, if you are 60 and plan on retiring in two years and you plan on using your 401k for income, you probably shouldn’t have 100% of your 401k in equities (stocks). On the other hand if you are 35 and you are planning to retire in 30 years, more equities might make sense.
Just be clear about what your goals and time horizon are before making investment decisions. A general rule is to increase your allocations to fixed income or bonds and cash as you get older and closer to retirement.
Don’t cash out prematurely
Most people switch jobs several times over the course of their career. What often results, is having to decide what to do with the balances left at previous employers. Depending on the amount and your immediate needs, it can be tempting to withdraw the cash.
However, workers who withdraw money from their 401(k) account before the age of 59½ face a 10% early withdrawal penalty in addition to, income tax on the amount withdrawn.
Early withdrawals cause you to miss out on the compound interest that is essential for building a large nest egg. Remember, this money needs to be put away for retirement, and that’s all it should be used for.
For most people, retirement seems so far down the road that they fail to adequately prepare. But, whether you’re ready or not, it’ll be here before you know it. Make sure to take the proper steps today, that will ensure you cross the retirement finish line with a nest egg that will allow you to enjoy a full and worry-free retirement for years to come.