As investors turn the page on a new year, it’s an opportunity to rethink their retirement plans.
But saving more for retirement doesn’t have to be complicated or involve a costly trip to a professional adviser.
Sometimes the most effective thing you can do is simply make a commitment to save more and use the tools already at your disposal, like your existing employer-sponsored 401(k) plan.
Maybe you’re getting a raise to start 2014. Maybe you’re planning on a big tax refund in a few months. Or maybe you are simply making a New Year’s resolution to plan ahead.
Whatever your motivation to save more, putting that cash into your 401(k) is a great place to start. Here’s why:
• Employer match. If you have a 401(k) match, you need to take full advantage of it. Many employers will chip in to your retirement fund based on what you yourself are saving — for instance, if you save 6% they will throw in 3% as well. So by saving for retirement, which you should do anyway, you’re effectively giving yourself a raise! Check with your human resources manager and make sure you’re not leaving any matching funds on the table in 2014.
• Tax benefits. Even if you don’t have a 401(k) match, you can reap big benefits from Uncle Sam by saving more for retirement in a 401(k). That’s because the money you put into this plan is taken out before taxes — and a significant contribution might bump you down into a more favorable tax bracket. And even if not, at least you get to avoid paying the tax man up front and put that money to work. Consider that $1,000 contribution to your 401(k) now will turn into $3,300 in 25 years with a modest 5% return. Paying taxes is no fun, but missing out on the investment profits is even worse.
• “Average in.” Some folks wait until they get a windfall like a big bonus to fund their retirement plan. But what happens if you take a big pile of cash and push it into the stock market right before a crash? Even the best minds on Wall Street have little luck with timing the market, so a better plan is to “average in” over time by investing frequently in smaller amounts. This allows you to buy at different periods of time and avoid buying right before trouble strikes. Using an employer-sponsored 401(k) means you have a built-in method for this, making contributions each pay period instead of one lump sum.
• Invisible savings. A recent FINRA study found that 59% of Americans spend their entire paycheck (or more!) each month. Part of that is a rough job market, but psychology is also a factor. Some folks simply have trouble controlling their spending. … So why not simply take the hassle out of saving and send money directly from your paycheck into your 401(k)? It may be tricky at first for some people to figure out how to get by on a few hundred bucks less each month. But if you can pull it off, you won’t miss the money.
• It’s time to catch up. Perhaps even more troubling than the number of folks living paycheck to paycheck is the fact that 40% of Americans near retirement age have zero saved, according to Federal Reserve data. And among those who have savings, the median balance is just $100,000. That may sound like a lot, but experts recommend 10 to 12 times your peak annual earnings — so if your household makes $100,000 you better have $1 million to $1.2 million saved up to maintain your lifestyle! Chances are, you’re not on track to hit this target. So make 2014 the year you start catching up instead of falling farther behind.
Courtesy of USA Today