Pensions are pretty much a thing of the past. With the
switch to company-based 401(k) plans, the burden of saving for retirement falls
to you. So it's vital for you to be engaged in your company-sponsored 401(k)
plan. Financial planners have some common tips to help you get more out of
those plans. For instance:
•Contribute at least enough to your 401(k) to meet the
employer match. Otherwise, you're giving up free money.
•Early withdrawals (before 59½ in most cases) can result is
significant taxes and penalties.
•If you're 50 or older, take advantage of the
"catch-up" provision, which lets you put an additional $5,500 into
your plan each year (on top of the $17,500 annual max).
By now, most people have heard those. So, here are a few
financial tips you may not have thought about, but will help maximize the value
of your 401(k) by the time you retire.
1. The 1% rule. One
of the things to do is increase (your contribution) by 1% each year. Each year,
up it by 1% till they reach the maximum. You can work that into a savings each
year. It slowly puts more money each year without hurting the budget.
2. Save that bonus. If
you get a bonus, max out your 401(k) withholding for that month and live off
the bonus. If you get a $5,000 bonus, normally, you'd live off your salary, and
you'd save 10%, or $500. I want you to withhold 100%, put it in the 401(k) and
live off the bonus for that month.
3. If you delay
retirement, keep your 401(k). If you are 70½, you have to withdraw a
certain amount. But if you are still working at 70½ and you have a company
401(k), you do not need to take out that minimum distribution until you
actually retire. We often see the wrong advice — roll that into an IRA. Then
that individual would have to take out the minimum distribution.
4. Don't forget about
that old 401(k) you left at your last job. Never leave your money at
the old job and forget about it. Many people work tirelessly and diligently to
contribute to a 401(k), and then they leave their job and don't carry that
diligence over. The money they worked so hard to save ends up underperforming.
5. Know your
company's vesting schedule: Many companies have a vesting schedule
with the company match in 401(k) plans. This is especially important for
Millennials. They tend to change jobs every three or four years. Many plans
don't vest for three or four years.
Overall, one out of every four job changers are not fully
vested and forfeited money. Millennials, one out of two forfeited money when
changing jobs. Multiple job hopping could reduce retirement income significantly
when they go to retire.
6. Beware of the
'retirement tax time bomb.' You get a good tax benefit up front from
putting that money in a 401(k).
More employers are offering a Roth 401(k) option, and they
especially recommend it for younger workers. Since taxes have already been
taken out, you won't be taxed when the money comes out. But Thompson says just
under 50% of employers offer the Roth 401(k) option, and only 7% of employees
are using it. You should talk to a financial adviser to see if the Roth works
for you.
7. When you retire,
don't withdraw too much, too soon. As they are entering retirement or
thinking about retiring, they should not withdraw too much too soon. Advisers
recommend 4% to 5% (a year). That number can be higher if you have other
assets. There are times when you can maintain a higher withdrawal rate. If you
retire at 70, your retirement is shorter, so you might be able to withdraw
high. If you have a significant pension, you may be able to tap into your
401(k) at a higher rate. If you will work in retirement, have a part-time job,
or own real estate and have rental income, you may be able to withdraw at a
higher rate.
8. Have an emergency
fund. This is "critical.” Everyone should have an emergency fund.
Best ways to start that emergency fund: Work with you
current financial institution and start a direct deposit. Make sure it is a
separate account. And think of it like the old vacation club or Christmas club
accounts banks used to offer.
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