August 9, 2017
August 9, 2017
Saving for retirement is a financial priority that most people know about, but when it comes to implementation, people are clueless. Even though you can start saving at any time, most people avoid it.
Fortunately, you don’t have to do it alone. These days, about half of employers offer 401ks to their employees and most provide some guidance on how to get started.
If you’ve just become eligible for your company’s 401k or want to start your own retirement plan, here are some basic tips to get going.
401ks are an employer-based retirement plan. Many companies offer these as a perk, similar to paid time off or health insurance. But many employees fail to take advantage of their 401k. That’s a mistake. Many companies not only provide a 401k, but they also offer a matching contribution if you put in money to your account.
If your employer offers matching contributions to your 401k, they’ll be on a vesting schedule. A vesting schedule says when the employee will be eligible to withdraw employer contributions from their 401k. Some have a 5-year vesting schedule, so employees will only be eligible to receive all of the employer’s money after five years.
Most of these are on a graded system, so every year you receive a higher percentage until you reach 100%. Others have cliff vesting schedules, so you have to stay the entire length before you’re vested. If you leave before that, you’re not entitled to any amount.
Examine your employer’s matching contributions. Some will match you dollar-for-dollar while others add in half of what you put in, up to a certain amount.
Many people select target date funds for their 401k. A target date fund is a mutual fund that’s based on the year you hope to retire in. A 25-year old might choose a 2055 or 2060 target-date fund if they hope to retire at 65. Target-date funds change their stock and bond mix as you age, so you don’t need to rebalance the portfolio as you get older.
Others like index funds, which track a certain index such as the S&P 500 or the Russell 2000. When you purchase an index fund, you buy ownership in hundreds of different companies. Being diversified in your 401k can help you avoid losing all your money in one fell swoop.
One of the biggest factors to look for in a fund is how much they charge to maintain the fund. Most funds earn between 5-10% so paying 2% annually in fees will severely diminish your future earnings. Investing experts suggest having funds whose fees are 1% or less.
One major reason people don’t save for retirement is that they aren’t sure how much they need to set aside. Depending on your age and retirement goals, you should save between 10-15% of your gross income. Saving that amount will allow you to maintain the lifestyle you have now in your golden years.
However, it can be daunting to start saving and find out that you need to tuck away 10% of your salary. Don’t get overwhelmed. If you can’t do 10% right off the bat, save as much as you can, even if it’s only $25 a month. When you get a raise or bonus, stash that amount immediately to your retirement. Aim to increase your savings by 1% every year until you reach your ideal goal.
Saving for your 401k can be the launching point to a successful, worry-free retirement.