Employees of all ages tend to treat 401(k) plans like gold, as if they are the only retirement planning tool necessary for a successful retirement, especially when their employer offers to match their contributions. Other strategies include an IRA, a Roth IRA, opening a health savings account, getting an annuity, delaying your Social Security Benefits, and others. These strategies can be intimidating for young workers, so when they have an opportunity to open a 401(k) plan, essentially a set-it-and-forget-it plan, it often becomes the only plan.
Anyone with a 401(k) should understand how to make the most of it, but also when to leave it alone and let the financial professionals do what they do best.
At Savage Financial, Mike Savage is here to help young and old workers alike plan for the future. If you are in the Pocono Summit area and want a professional retirement planner to guide you through your saving and investing journey, get in touch with Mike today.
The Dos of 401(k) Plans
- Start Early: Investing money as early as possible and as consistently as possible is your best bet, even if you’ve just been working for a month and are making $20,000 a year. When there is some money in the account, there are two things that will be working for you each month: automatic contributions and compound interest. Depending on how much you are contributing, each year the interest will add a certain amount on top of that, making it easier to reach your goals.
- Take Advantage of Your Match: If your employer offers to match your contributions, this will essentially be free money in your account. If your budget allows, contribute as much as possible (which is $19,000 per year in 2019), and your employer will match a certain percentage of your salary. For example, if you earn $50,000 and your employer matches 6% of your salary, they will contribute $3,000 to your plan.
- Increase Your Contributions: Does your company offer yearly bonuses and/or salary increases? Studies have shown that employees who have automatic contributions don’t miss having the money in their checking account. So, when you can, increase the percentage of your contribution every time you see an increase in your paycheck.
- Check Vesting Schedules: Some companies offer to match employee contributions, but put limits on when they will match. Vesting schedules are terms that state, for example, an employee must work at the company for three years before the employer will match. If an employee doesn’t meet those terms, funds that were already matched can be clawed back. So, when you’re deciding on whether or not to take a new job, make sure that your current employer doesn’t have a vesting schedule, or that you have been employed for a given amount of time.
- Diversify: Thinking of your 401(k) plan as an investment can be scary, especially when you aren’t actively participating in the investment and simply letting the provider manage the account. However, when you can, diversify across asset classes, including stocks and bonds. You may also want to consider international and domestic investments.
Your 401(k) plan can be a powerful tool in your retirement planning shed, but it needs to be used correctly. If you’re unsure of how healthy your account is, get in touch with Mike Savage of Savage Financial. As a financial planner in the Pocono Summit area, Mike has helped dozens of clients plan effectively for the future.
In our next post, we will discuss the “don’ts” of your 401(k) plan, so check back soon and contact Savage Financial for retirement planning and more today.