Tips for Using Your 401k

The time to prepare for retirement is not the year before or 5 years before retirement age. The time to plan is now. A 401K plan is designed to help employees save for their retirement. There are two separate types of plans; a traditional 401k and a Roth 401k. Both of these have their advantages. The traditional 401k money isn’t taxed when the money is placed in the account, but when it is removed. The Roth plan is the opposite in that, income is taxed before placing it into the account and is removed tax-free upon retirement age. Whichever plan is chosen may rely completely upon what an employer is offering. In order to maximize the amount of money available upon retirement age there are a few simple steps you can follow.

The first essential step is to start contributing money right away. Don’t wait for the ‘right time’. That time never really comes. Start by contributing just 1% of your income to your 401K. This is the first step in creating financial security in your future. Make it a goal to increase that amount on an annual basis. This year 1%, next year 2% and so on and so forth. Contributing now is especially important if your employer matches your contribution. If at all possible, put in the amount that your employer will match. This can be anywhere from 3-8% depending upon the company. Imagine contributing just 1% of $30,000. This is matched by your employer so that by the end of the year you have $600 plus the interest on your investment. Now that you’re in the habit, soon you’re contributing 10% of your income and your employer matches up to 5%. Now you’re at $4500 plus interest. This snowballs into $20,000 then $30,000 and beyond. It takes the first small step to get there.

Determine what you need from your 401K money. This greatly depends upon what stage of your life you’re in. Are you five years from retirement or 15 years from retirement? Do you plan on working after retirement or does this money need to pay for all of your living expenses from the age of 60 to the years beyond? If you have five years or less until retirement then you may want to invest in more stable items such as bonds. For those with 15 years or more until retirement, consider it safe to play with stocks. Yes, the stock market has it’s ups and downs but you have plenty of time to sort that all out. The stock market is a long-term investment. Don’t panic if everything takes a dive, stay the course and keep investing. If you continue to buy stocks in the “bad times” then you are actually getting it much cheaper than before and will double or triple your money when the stock market recovers. History has proven that the stock market always recovers.

Retirement should be a time to sit back, relax and enjoy life without having to worry about making ends meet. You are the only one responsible for your retirement. Don’t rely on others to take care of you. Take the steps needed to secure your financial future today. If you already contribute to your 401K then take a look at your portfolio and find out if you’re making the best investments for your age. If you don’t contribute then start now.