Updated December 9, 2020: Nearly one in three Americans have less than $50,000 saved for retirement, according to a recent TD Ameritrade poll. If you retire at age 65, you can expect to spend about $981,150 over the course of a 20-year retirement — so why are Americans so far behind?
If you work for a company, your first stop on the retirement roadmap is going to be with your 401(k). You don't need to know all the ins and outs of 401(k)s before you start saving, but you do need to know these five 401(k) tips that will help you supercharge your savings.
If you're already saving for retirement, congrats, you are ahead of the game. But you want to make sure you understand your account.
Just like checking your credit score every year, you should set a reminder to evaluate your 401(k). The fund choices can be confusing, but there are a number of online resources to help you make sense of your options. Or, consider consulting a financial expert to walk you through your options and even offer recommendations on where to invest.
Most people use the set-it-and-forget-it method when it comes to saving money in their 401(k). It's easy to carry on knowing that you are saving money towards retirement, but as your income increases, your savings should also increase. Studies show that even increasing your retirement contribution percentage by as little as 1% can have a huge impact on your overall retirement balance.
The idea is to grow your retirement savings percentage steadily by 1% every year or every other year to get the most out of your savings. For the overachievers, a good recommendation is to increase your retirement savings percentage by half, or all, of your annual salary increase. For instance, if you get an annual bonus of 3% in pay, go ahead and bump up your retirement savings by 1.5% to keep pace.
One of the best perks of a 401(k) is the ability to receive matching contributions. They are essentially free money that your company is willing to contribute to your 401(k), provided you contribute a certain percentage of your own money each month. Most companies match up to 6% of contributions, but you should check with your human resources department. Your goal is to contribute enough to your 401(k) to max out the matching contributions: If your company matches up to 6%, try contributing no less than 6%. You're just leaving money on the table otherwise.
Most companies have a vesting schedule, meaning you will need to stay at that company for a given amount of years to be fully vested in their contributions towards your retirement account.
For example, if a company has a six-year vesting schedule, it would look like this:
Year 1: 0% vested
Year 2: 20% vested
Year 3: 40% vested
Year 4: 60% vested
Year 5: 80% vested
Year 6: 100% vested
If you decided to leave for another job in year six, you would walk away with your savings (you always get to take this amount) plus 100% of the matching funds from your company. If you left after year 5, however, you would take all of your money plus 80% of the matching funds from your company.
Saving in a 401(k) is great, but as we all know eventually you will need to pay taxes on the money you are saving. When you go to retire, you will owe taxes on however much you withdraw in a given year at your current tax rate.
Enter the Roth. It's similar to the 401(k) and IRA. With a ROTH, you can save up to $6,000. The catch? Roth contributions are not tax deductible. Money grows tax deferred, and since you paid taxes when you invested the money, you won't owe taxes on any withdrawals (as long as it's a qualified withdrawal). A Roth can be a nice balancing act to your 401(k) savings, helping you diversify your income streams in retirement.
Do you have multiple 401(k)s from previous employers just sitting right where you left them? It's a common mistake that many people make simply because they don't know their options after they leave their job.
If you leave your company for a new job, you can either leave your 401(k) as is and your money will keep growing. However, you can't contribute any more to that account.
Or you can roll it over to your new account. Typically the best way is via direct rollover (you want to avoid having access to the funds yourself) to an IRA set up at companies like Fidelity, Vanguard, T. Rowe Price, etc., where you will then have access to a wider range of investment choices and where you can continue to contribute money each year to this account.
If you have multiple old 401(k)s sitting around at old jobs, you can roll those all over into one giant IRA, and suddenly your retirement snowball will get even bigger.
Want to learn more about saving for retirement? Check out our retirement learn center.
Image: Vlad Sargu
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