Saving independently for retirement is a great way to help
ensure that you have enough money to cover your living expenses as a senior.
While Social Security may provide you with a nice chunk of cash, it generally
isn't enough to live on in the absence of other income.
If you have a 401(k) plan, funding that account could be
your ticket to the comfortable retirement you've always wanted. But it's also
important to manage that account wisely. Here's a guide to doing just that.
Step 1: Learn what your employer match entails
Many companies that offer 401(k) plans also match worker
contributions to some degree. Your employer may, for example, match the amount
you put in up to 5% of your salary, so if you earn $50,000 a year and put in 5%
(or $2,500), you'll get a free $2,500 in return. Make sure you know what your
match looks like so you're able to capitalize on it in full.
Step 2: Figure out your maximum allowable annual
contribution
Annual contribution limits for 401(k)s aren't set in stone.
Rather, they can change from year to year (though sometimes, the same limits
stay in place from one year to the next). It's important to know how much money
you're allowed to contribute to your retirement savings on an annual basis.
Right now, if you're under 50, you can max out your 401(k)
plan at $19,500. If you're 50 or older, you can make a catch-up contribution of
up to $6,500, bringing your total allowable contribution for the year to
$26,000. Keep in mind that any matching dollars you get from your employer
don't count toward that annual maximum.
Step 3: Determine how much you can afford to contribute
You may be allowed to contribute up to $19,500 or $26,000 to
your 401(k), but that doesn't mean you can swing that amount given your income
and living expenses. Many people can't max out a 401(k), so rather than stress
over that, crunch some numbers to see what you can afford. And if you're not
happy with that number, you can look at cutting back on some existing expenses
to free up more cash for your retirement plan.
Step 4: Make sure your investments are set up
appropriately
The money you put into your 401(k) shouldn't just sit in
cash. Rather, invest it so it grows into a larger sum over time.
A good bet, if you're years away from retirement, is to put
most of your money into 401(k) funds that are loaded with stocks, as opposed to
bonds. Bonds may be a more stable investment, but they usually generate a lot
less growth over time than stocks.
Keep in mind that 401(k)s generally don't let you buy
individual stocks, so you'll need to select a fund with a stock-focused
portfolio.
Step 5: Pay attention to fees
Your 401(k) plan might offer anywhere from a dozen to
several dozen different funds to choose from. But not all funds are created
equal.
Actively managed mutual funds -- which employ actual fund
managers to select the stocks they invest in -- tend to charge high fees, known
as expense ratios, that can eat away at your 401(k)'s returns. On the other
hand, index funds, which are passively managed, tend to charge much lower fees.
This isn't to say that actively managed funds are never
worth the higher fees -- in some cases, they might be. But it's a good idea to,
at the very least, be aware of what you're paying and make sure those higher
fees are worth it. But if you see that an actively managed fund has a
comparable performance history to a much cheaper index fund, then you may want
to go with the latter.
Saving money in a 401(k) could set you up for a financially
secure retirement. Do a good job of managing that account, and you'll be even
more likely to meet your financial goals.
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