Are you one of the 20 percent of Americans who has little to nothing saved for retirement? If so, the answer to your retirement plans might lay in your job’s 401K plan. But how can you maximize this program offered by your employer?
A 401k is a retirement savings plan that allows a person to save for retirement by taking a set percentage of their earnings out of their paycheck each pay period. This money is invested and looked after by the employer. Some companies match what you invest in your plan by a percentage or all of what you have contributed to your retirement plan.
A 401k plan sounds easy enough, but putting together the basis for your retirement plan when you are in your early 20s is a lot more daunting than it seems. The last thing one wants to do in the beginning of their career is take out even more money from their paychecks. Between rent, food, student loans and day-to-day expenses, taking just 5% out may seem like too much.
Although it seems hard, starting your 401k plan now will really help down the road. Here are some tips on how to set it up so you can still live comfortably now, and plan for a retirement where you can live comfortably as well.
Analyze Your Current Plan
Sometimes the plan structure you’re using isn’t the best. If you want to increase your retirement savings, think about changing plans or fund options. Remember that your plan will dictate how much interest you earn on your contribution. It also determines how and when you get access to your money and what investments will be made with it. It’s a good idea to sit down once a year to analyze your plan, look at interest rates, and see where the greatest earning opportunities lie. If you see a hole in your current plan, then make the switch.
A good example of this might be changing from a traditional 401K to a Roth 401K, which have their own unique benefits. Consider consulting with a retirement professional to learn more about these two plan options.
Even before you get your first paycheck, fill out the required forms to start your 401k. Although many companies might push you to save 10% initially, it is OK to put as little as 4% into your retirement plan. As you earn raises with your company, the amount you put away will increase, and you can continue to raise the percent you put into the plan.
Increase Contributions When & How You Can
Did you just get a raise? Great! Why not use that difference to build up your retirement fund? Increasing your contributions whenever possible is a great way to build up your 401K without even lifting a finger. Letting your money work for you by earning interest in a 401K account is an excellent way to strengthen your retirement plan.
Make Small Increases in Your Contributions
If you would rather not throw your hard earned raise dollars to your retirement, then another option is to create a savings strategy that increases year over year. Even as little as a one percent increase in what you save can make a big difference in retirement.
The major reason employees don’t take part in 401(k) plans is an understandable reluctance to have more money withheld from their paychecks.
So start small, even as little as 1% of your pay, if necessary. You’ll hardly notice 1%. We promise.
If you’re contributing to a Roth 401(k), every dollar you contribute will be a dollar less in your paycheck.
But since traditional 401(k) contributions aren’t taxed, every dollar you put into your account will cause your take-home pay to fall by only 65 cents to 90 cents.
If you’re making $40,000 a year, contributing 1% percent of your salary adds $8 a week to your retirement account but only reduces your paycheck by $7 a week.
You know you can manage without that $7, especially when it’s going to amount to much more down the road.
Want to strengthen your retirement savings? Put these simple tips into practice and you’ll see a remarkable difference.