Getting the most from your 401k can make all the difference in the world when you’re ready to retire. With the ability to spend $ 19,500 per year – or even $ 26,000 if you’re over 50 – in a tax-efficient way, it’s pretty straightforward to wind up a retired millionaire just by using your 401k.
Of course, just because it’s simple doesn’t mean it’s easy. If it were easy, everyone would already be on track to achieve this goal. To get there, you need a plan to get you from where you are financially to where you want to be. These five strategies are the ones you need to consider for your 401k as you work on crafting your winning retirement plan.
N ° 1: Set your contributions based on a percentage of your salary
You have the choice of how much you contribute to your 401k plan. Most companies allow you to either set your contribution amount as a specific dollar amount or as a percentage of your salary. Unless you’re at the point where you’re actively contributing to the maximum that’s allowed for you, you’ll want to set your contribution based on a percentage of your salary.
The reason is that when you get increases, a portion of those increases will go straight into your 401k plan. It’s a fairly straightforward way to ensure that your 401k contribution grows over time, even if you aren’t actively contributing to it along the way.
N ° 2: Set this contribution rate at at least as high as your employer will match
If your employer offers you a match, investing enough to maximize that match should be the very first investment you make when thinking about your long-term future. A 401k match represents the easiest path to building your available nest egg for many people. Indeed, depending on the terms of your match, it can even be a central element of the easiest way to double your money available for you.
Whether you want to invest more than that in your 401k is up to you. On the one hand, it’s an incredibly easy way to withdraw a lot of money automatically, straight from your paycheck, which can be a great way to get you on your way to getting rich. On the flip side, 401k plans often have limited choices and can have high fees. If you are not happy with the terms of your 401k, you may want to consider placing the next long term batch of money in an IRA.
N ° 3: Register for the automatic increase in contributions
If you are just starting to invest, it may be difficult for you to find a significant amount of money to invest right off the bat. One strategy that many companies offer to help is growing contribution. Essentially, with these plans, you can sign up for a running contribution, the target you would like to go, and the step amount in between that gets you there. Then each year your contribution will increase by one step until you reach your goal.
For example, suppose you start with a current 5% contribution, set a goal of 10%, and include a 1% step. During your first year, you will contribute 5% of your salary to the plan. The second year, you will contribute 6%. The third year, you contribute 7%, and so on until you reach 10%. From that point on, until you change your contribution amount (or reach your plan’s maximum), you’ll save 10% of your salary for retirement with every paycheque.
Taking advantage of premiums that automatically increase is a great way to commit to funding your long-term future without having to make a huge immediate sacrifice. As you establish yourself better, exceed the expensive start-up costs of a new job, earn raises, and discover ways to lower your daily cost of living, it should be easier. save more. With this type of plan, you make the promise to yourself and your future today, and then give yourself the time it takes to make it a reality.
# 4: Invest In Low Cost Index Funds For Your Money Over The Long Term
In the long term, the simple strategy of buy regularly in a broad-based index fund tends to beat investments that the vast majority of professional fund managers trust. This makes index investing in your 401k a great way to build your nest egg over time. It’s easy, it’s low-maintenance, it’s usually very inexpensive, and it allows you to get market-type returns without too much effort beyond the initial paperwork to put things right. square.
For the money you save for your long term future in your 401k, indexing is one of the best things you can do. Just recognize that an equity-intensive approach can be a great way to build wealth over time, but it is an extremely risky way to generate cash for your spending needs at home. short term. As you get closer to the need to spend your money, you should start withdrawing some of it from stocks and towards assets like CDs or cash which are more likely to be worth it. What you need when You need it.
N ° 5: Revise at least once a year and adjust as needed
While auto investing in your 401k can be a great way to build wealth, the reality is that life changes. You can advance in your career which gives you more money to invest. You can choose to cut down on your hours or take time to raise a family or take care of a loved one. The market can far exceed your expectations, bringing you much closer to your goal. And remember, with each passing year you will get much closer to your expected retirement date.
Whatever the reason, a plan you put in place in the past might have been perfect when you put it in place, but not necessarily your best way forward from today. . Therefore, you should review your plan at least once a year and make adjustments based on your actualized reality. Set a reminder on your phone. Put a repeat invitation to yourself on your calendar.
Anyway to get you to do it, be sure to take a little every now and then to check on your own future. It’s much easier to make small course corrections along the way to help get you closer to your goal than it is to wake up and find that your goal is out of range because you didn’t. make a little adjustment earlier.
Make your 401k the cornerstone of your retirement plan
With these five strategies, you can make your 401k the cornerstone of your retirement plan. Remember, investing works best as a long-term tool to build your wealth over time, so the sooner you start, the better your chances of ending up on top.