The 401(k) may well be the best investment tool ever for building long-term wealth, and many people don’t take advantage of it. Is it time to take a second look at your 401(k)? Here are six ways you can maximize your retirement savings starting right now — even if your plan only offers a few investment options. You’ll be amazed by the difference it can make!
Start Investing for Retirement.There’s no time like the present to start investing. So many workers put off starting to invest till “later” — after the car is paid off, after the kids finish college, after the new house is purchased. The amount of time that you have money invested works in your favor — almost overshadowing the particular investments you choose. This is particularly important in your 401(k) account, since you are investing tax-deferred.
Get Your Employer to Match. Many employers match a certain percentage of your 401(k) contributions. This is free money. You can’t do better than that. However, even if your employer doesn’t “match” contributions, you still will benefit from participating in a 401(k) program — your paycheck will be reduced by the amount of your 401(k) contribution before you pay taxes on your salary. The government doesn’t see that money, but you will!
Don’t trade your account. It is a very common emotion to feel scared at market bottoms and overly confident at tops. Try to resist the urge to sell all of your equities when the market makes you nervous, along with not to transfer everything into equities when high. If you feel that these extreme periods cause you stress, not opening your account statements during these times can help you manage your emotions.
Diversify. We all have heard this over and over again from financial planning experts. Many employees like to concentrate their account balances in one or a few funds they feel will perform well or are very safe. But having all your eggs in one basket is not a strategy for success because you are essentially betting on only one economic scenario. Try to vary your money placement so you can make it work for you at a higher rate.
Keep your money in the plan. We all work hard to save. We cut our coupons, shop online for the best deals, and even delay purchases when needed. But during times of low, or even no income at all, you should not take loans, withdrawals or cash your 401(k) balances out. Taxes and penalties can reduce what you receive from these distributions by almost 50%. In addition, you are only going to make retirement a farther away dream when you spend money from those savings.
Keep saving – always. There are a number of reasons to quit saving: your spouse loses a job, you want to save outside the plan for a home, car, boat, marriage, etc. It is common that when the equity markets fall, saving decreases because it is believed to be a bad time to invest in the market. It is understandable to lower your contribution rates if you have to, but never go to 0%. Remember, we all need to average 15% in savings over our entire careers to retire at our current standard of living.
These are all important ways that you can contribute to your future and finally have your money work as hard as you do.