Are you preparing for retirement? Are you maximizing the various options for retirement accounts? Provided you meet the income guidelines you can open either a ROTH IRA or a Traditional IRA and in the event you are self-employed or work at a smaller business you can have a SEP IRA as well. But one of the best ways to generate large sums of money for retirement is to take advantage of your employer’s 401(k) plan especially of they offer a company match. That is free money that will add to your retirement nest egg regardless of what the markets do. As I have said before always pay yourself first and always contribute up to the percentage that there is a company match. Then if you can contribute as much as you can as these funds will grow tax deferred until you withdrawal the funds after age 59 ½. So how do you maximize your 401(k)? Here are some simple steps to help you on the way to a healthy retirement.
A little money put in a 401(k) in your early 20’s can lead to big paydays in retirement thanks to the power of compounding interest. According to some statistics if you contribute to your 401(k) for 30 years and combine that with your potential Social Security you can realistically replace about 60% of your income at retirement. As I showed in the blog on savings if you save $4,000 a year for about 35 to 40 years with a return of about 8% you can retire a millionaire. Not an unrealistic goal depending on how much you elect to put in your 401(k) from an early age and get a decent return on your investment.
If you are not sure of your investing style or ability to tolerate risk you may want to find a financial planner that will assist you for a fee. There are plenty of on-line tolls that can tell your tolerance for investment risk and with a little research you can find a good ETF or mutual fund to invest in for the long-term.
No matter how good you think you are with finance everyone needs a budget to know how and where there heard earned money is going. Develop a budget that allows you to not only live a comfortable life but one that will allow you to save for retirement. Take an honest look at where your money goes and see if you can find ways to make savings and then turn those savings into additional contributions to your IRA or 401(k).
Now consider that the 401(k) has been around for about 40 years. This makes those retiring now and those who will retire going forward rely heavily on the 401(k) for their retirement income. Also it is time to consider that most of us will not be like our grandparents or maybe even our parents and work at one job for our entire career. So what happens when you change jobs and both have 401(k) plans that you have participated in? Well you have two basic options when this occurs.
One is to cash out the IRA when you turn 59 ½ and pay the regular income tax on the gains you have achieved over the years. That means leaving the money with your old employer but also means keeping track of the plan’s administrators. A second similar option that keeps the money in a 401(k) plan it to roll the money over into your new employer’s plan and continue to do this every time you change jobs. That way the money will follow you and you only have to keep track of your current plans administrator.
Another option is to roll the funds over into an IRA and not your current employer’s 401(k) plan. Not all employers will allow you to roll over a 401(k) so a Rollover IRA is an option. But make sure you have the old employer’s 401(k) administrator pay your IRA administrator directly or they may withhold taxes and early withdrawal penalties from your amount. The Rollover IRA will give you more investment options and give you more control than rolling it over into a new 401(k). But with that decision comes investment risks of possibly having too many investment choices to choose from.
Not all 401(k) plans are created equally so watch out for the hidden charges. Your old employer may have a great plan with low costs meaning it would be wise to leave the funds with them instead of moving them to a new 401(k) that is not as efficient or a Rollover IRA. Check and compare the plans before you do anything.
Saving early and often is the key to a golden retirement. Use IRA’s and 401(k)’s to save money in a tax deferred or tax free manner depending on it is a Traditional or ROTH account. Use budgets to get the most out of your hard earned money and save the maximum you can early while you are young. Then invest wisely and watch the power of compounding interest work in your favor.
