Your 401(k) is the key to financial freedom during your golden years. Learn the best ways to maximize your 401(k) today.
Saving for retirement as early as you can is important. You’ll grow your earnings and have more to enjoy during your golden years. With pensions becoming a thing of the past, it’s important for everyone to understand how to maximize their 401(k) return.
Check out our top 8 401(k) tips below. These tips generally apply to 403(b) and 457(b) plans as well.
1. Contribute at least as much as your employer will match to your 401(k) retirement plan.
How does free money sound to you? Of course, it sounds pretty good. That’s exactly what you get when you get an employer match. Let’s say your employer will match 5% of your salary in contributions. If you make $75,000, contribute at least $3,750 and your employer will too, giving you $7,500 right off the bat.
2. Invest aggressively during your younger years.
When you are years away from retirement, go ahead and get aggressive. This often means investing in more stocks than bonds. Why not take the chance of earning big returns when you can? As you age, you’ll want to taper off the aggressiveness, opting for safer investments and more stable returns, but your younger years are meant for aggressive earnings.
3. Make steady increases in your contributions each year.
Don’t get stuck making the same contributions year after year. Let your contributions grow. Even if you increase them by 1%, it helps increase your returns. Honestly, a 1% increase is barely noticeable in your paycheck. Let’s say your gross income is $1,000 and you contribute 3%, that's $30 deducted from your paycheck. If you increase your contribution to 4%, your paycheck deduction will increase to $40. It’s not that much more out of your paycheck, but that $10 will make a difference in your earnings 20 to 30 years from now.
4. Allocate your assets appropriately.
Don’t put all of your eggs in one basket. Diversify your funds. Put some of your money in stocks as well as bonds or ETFs. If one area of the market tanks, you won’t lose everything, but will have your more stable investments to rely on.
5. Watch the fees in your 401(k) retirement plan.
Fees can quickly eat up your profits. Don’t just let your account automatically get invested in the default investment options. Do your own legwork and look for low-cost investment options. Every dollar counts when you’re investing in your future and commissions/fees add up quickly.
6 Try to be fully vested.
If you leave a company before you’re fully vested, you leave money on the table. You can’t take the funds your company contributed on your behalf until you’re fully vested. Each company has a different timeline they require. Know your company’s requirements before leaving and losing any unvested retirement income.
7. Don’t touch your 401(k) funds.
No matter how tough life gets, try to leave your 401(k) funds alone. Not only will you pay taxes and a 10% penalty for early withdrawal, but you’ll also lose your retirement funds. Exhaust all other financial assistance options before touching your future funds.
8. Bank your raise.
Rather than spending your new raise, why not save it? You lived without it before; why not let it fund your future rather than your present? If you can’t bank your raise, at the very least, bank any windfalls or bonuses you receive. Your earnings will grow faster and your future self will thank you.
Maximizing your 401(k) return takes consistency and dedication. The best thing you can do is start early and diversify your investments to make the most of your retirement income.