If you’re a Millennial, you may have heard your parents talk about their pension plan when you were growing up. If they’re lucky, they may now be retired on that plan.
But pension plans have become a thing of the past—a bygone relic of an earlier age when employers saw to their employees’ retirement.
We are now facing a looming retirement crisis. Most people who are working today will retire on little or no money. Many will never retire at all. If you are a young person just starting out, you are essentially already behind. And you are expected to figure out your entire retirement plan yourself.
Your company may offer a sponsored 401(k) plan. If it does, you are going to want to get in on it as soon as possible. You may already know some basic rules of thumb for doing this.
You need to contribute at least enough to get your employer to match, otherwise you are wasting money.
Withdrawing early can result in penalties and taxes. If you are 50 or older, you can add extra money each year through a “catch-up” provision.
You likely already know these tips since they are pretty basic. But here are a few you may not know.
1. Follow the 1% rule.
If you can, try and increase your contribution to your 401(k) plan by 1% every year until you reach the maximum. This is a rate of growth which is very manageable and should be relatively easy to budget around.
2. Use your bonuses.
If you get paid a big bonus one month, withhold the equivalent amount for your 401(k). Live off the bonus. Essentially, anytime you have a chance to withhold more money, do it.
3. Keep your 401(k) if you delay your retirement.
If you are working into “retirement” age, you do not need to take out the minimum distribution from your 401(k) plan until you actually retire for real. So don’t do it.
4. Don’t forget about your old 401(k) plans.
If you work a number of different jobs at various companies over the years (which is becoming increasingly the norm), you are probably going to accumulate a number of 401(k) plans.
It is amazing how many people actually just forget completely about their old 401(k) plans when they move onto another position, even after contributing to them month after month, year after year. Take care of all of your retirement money. Nobody else is going to do it!
5. Try not to job-hop if you aren’t vested.
Most companies with 401(k) plans have something known as a “vesting schedule.” Basically, until you have been with the company for X number of years, you are not considered “vested.” Any money your employer has been contributing to your plan is forfeit if you change jobs.
It can be challenging to stay with one company for a long enough time to become vested in a 401(k) plan, but it is important to do your best to manage it. If you are tempted to quit and have a chance to stay on, ask yourself how much money you would be giving up if you left. It may be worth it to hang around for another year or two.
6. Consider Roth 401(k)
One of the biggest problems with 401(k) plans is the so-called “retirement tax bomb.” Basically, you contribute each year and you completely forget that you haven’t paid taxes on that money. Then when you finally get to the age where you can withdraw, you are slammed with a huge tax bill.
There are two ways to deal with this. One is to set aside the taxes in advance to the best of your ability. Put them in a mental envelope labeled “Not mine.” An easier solution is a Roth 401(k). These plans have the taxes taken out in advance. The downside is that under half of all employers offer them.
7. Don’t overdraw.
When you hit retirement, you may be tempted to withdraw a ton of money right away. Try and talk yourself out of it and keep your withdrawals down to 4-5% per year—unless you are still working part time or have income from some other source.
8. Make sure you have an emergency fund.
Make sure while you are working that you set aside money on a regular basis to deal with large and small emergencies. Why? If you do not build this into your budget, you may very well be tempted to pull the money out of your 401(k). It is pretty hard to grow your retirement savings when you are constantly eating into them.
9. Track down hidden fees and eliminate them.
Sad as it is, many 401(k) plans include a number of hidden fees. You may not notice them now, but later down the line they will return to bite you. Consider a robo-advisor as a useful means to identify, track down, and eliminate these hidden fees.
Not sure what to sign up for? There are a lot of good choices, but one of the best is Personal Capital. Want to learn more? Read this Personal Capital review.
Now you know some great tips and tricks for getting the most from your 401(k). So how much should you have in your 401(k)? There are financial guidelines based on your age, but it’s important to be realistic in our challenging modern economy.
You may struggle to meet your goals, but the best thing you can do is put in as much as you can. Do that diligently and keep your expenses down, and you will give yourself the best possible shot at a comfortable retirement.