People are living longer, which has become a problem… in that we risk outliving our retirement income. Pensions are all but unheard of outside of heavily-unionized industries and the government, and both these entities have increasingly transferred more and more responsibility to the individual worker as far as their retirement account is concerned. When it comes to employer-sponsored plans like 401(k) s, it is vital for workers, savers and investors (and you should see yourself as all three) to make the most they can out of the plans. While there are some differences with other plans, like 403(b) s, most of this advice applies fairly well across the major plans in the United States. Below is a list of ways to get the most benefit out of your 401(k).
Work Backwards – For folks who have the ambition and the financial wherewithal to truly make the most of their 401(k), one of the best ways to begin is by working backwards. Take your maximum allowable contribution (your 401(k) plan documents should make this number relatively clear, or you can ask for help), divide it by the number of pay periods in a year, and see where that leaves you.
Make the Match – Fully exploiting employer matching is one of the most vital strategies in getting the most out of a 401(k) plan. Matching is pretty much exactly what it sounds like – subject to certain rules and limits, your employer will contribute the same amount of money you contribute, effectively doubling your retirement savings without decreasing your salary or increasing your tax burden. Many employer matches kick in at 3% of your pay (or higher), so try as hard as you can to at least contribute this much. Afterall, who doesn’t like free money?
Watch the Costs – As part of some employee retirement plans, workers can avail themselves of investment advice from independent professionals. Be advised that this advice is rarely free and it may cost up to 1 to 2% of your funds to get this help. It’s understandable that many workers feel overwhelmed when it comes to calculating their contributions, and then investing that money in a relatively fixed menu of investment options. However, if the advice really is from someone who does not stand to directly gain from the advice they give, and they are qualified to help you understand the options, it may be well worth it.
Consider Borrowing – For workers who save some funds in a 401(k) but find that they cannot contribute more, because they are saddled with expensive debt, there may be a counter-intuitive option. Most plans have provisions that allow employees to borrow funds from their own account. This money comes relatively free of strings ( as what the funds can be used for), and it is possible to use it to repay much more expensive debt, like credit card debt. This money does not come free, but the good news is that the interest charged is basically being paid to you.
Additional Options – What do you do if you have maxed out your 401(k) or you really hate the investment options offered? In most cases, it is allowable to have a Roth IRA and 401(k) and contribute to both in the same year. The Roth IRA contributions are not deductible, but the money put aside this way can still accumulate tax-free over decades.
Once you have contributed as much as possible to these tax-sheltered accounts, there are still other ways to save for retirement. People who are lucky to have maxed out their 401(k) or IRAs in a year can consider buying and investing in annuities. There are a lot of problems with annuities – they can carry high sales loads, they typically have high expenses and sponsors have continually transferred more risk to the investor. All of that said, money in an annuity can accumulate without year-to-year taxation, and it is a worthwhile option if protecting even more retirement savings from the taxman is important.
Additionally, you can invest in real estate. The gains are not calculated until/unless you sell, and your tenants pay your mortgage, adding to the wealth created by the appreciation.
Speak up – Notifying your employer about a deficient plan can be an effective means of improving your options (and those of your co-workers). If you do not like how a plan is organized or the investment options on offer, say so. Keep in mind that many employers choose 401(k) plans on the basis of what is cheapest and most convenient to offer, and they may not even be aware of its deficiencies. While it is true that many workers do not like to be a squeaky wheel, and some companies are certainly apt to be more responsive than others, doing nothing is a pretty good way to ensure that the plan will get no better.
Careful savings is not likely to be the gateway to becoming a millionaire or independently wealthy, but it can at least go a long way towards ensuring a more comfortable and desirable retirement. Whatever the specific plans being offer to you, be it a 401(k), a 403(b), an IRA and so on, make sure to contribute as much as you can afford and take full advantage of your opportunity to save money for the future.
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Choose to have an amazing day….Jeff