Putting money in your 401(k) helps you be more prepared for retirement, but how far that money goes in the future depends in part upon the choices you make now. The amount you contribute matters, but so does what you invest in and your plan's rules.
Here are a few key strategies that can help you get the most out of your 401(k) at every stage of your life. It may not always be easy to follow them, especially if you're struggling financially right now, but do your best.
1. Keep your fees low
All 401(k)s charge fees, though most people don't realize it because the money comes directly out of their 401(k) balance. There are administrative fees, which cover things like record-keeping and account rollovers, and then there are fees related to your investments, like the expense ratios on mutual funds. Some may charge a flat fee, but often, you pay a percentage of your assets.
A 1% fee may not sound like much, and it may not be that much if you only have a small sum in your savings. You'd only lose $10 if you had $1,000 in your 401(k). But as your balance grows, that fee becomes a much greater burden. On a $1 million portfolio, a 1% fee adds up to $10,000.
You can't avoid fees completely, but you may be able to reduce them by choosing your investments carefully. Read the prospectus carefully to learn about fees associated with your investments and talk to your employer about adding more options if it doesn't offer any low-fee investments. Try to keep your fees under 1% of your portfolio per year, and the lower, the better.
2. Claim your full employer match
Your employer match is extra money your company gives you to fund your retirement, and it could be worth thousands of dollars. Every company has its own matching structure, so check with your HR department or plan administrator to learn how yours works. Some offer dollar-for-dollar matches while others may only match $0.50 on the dollar. Most companies also cap matches at a percentage of your salary.
For example, it may only pay $0.50 on the dollar up to 6% of your salary. If you earn $50,000 per year, 6% is $3,000, so if you contribute this much on your own, your company will add an extra $1,500, giving you $4,500 in retirement savings for the year. If you fail to claim your employer match, that money is gone for good, so it makes sense to take advantage of it unless you need all your income to cover your living expenses.
Be mindful of your company's vesting schedule, particularly if you haven't been there that long or are planning to leave soon. The vesting schedule determines when you get to keep your employer-matched funds if you leave the company. Quitting before you're fully vested could cost you some or all of your employer match and that could screw up your retirement plan.
3. Contribute some money every month
Get into the habit of setting money aside for retirement regularly. The easiest way to do this is by automatically deferring a percentage of each paycheck for retirement. Establishing this habit will keep you on track for your goals and it will make it much easier to save enough, especially if you start while you're young.
Consider someone who contributes $100 per month for 30 years. If they earned an average 7% annual rate of return, they'd end up with over $113,000 in the end. Compare that to someone else who maybe scrapes together $25,000 through sporadic contributions over 20 years and then begins contributing $100 per month in the 10 years preceding retirement. Even if they earned the same average 7% annual rate of return as the first person, they'd only end up with a little under $66,000 in the end.
If you're not able to save as much per month as you'd like right now, just save as much as you can and try to increase your contributions by 1% of your income each year. When that's not feasible, you may have to rethink your retirement plan. Delaying retirement is arguably the quickest way to shore up your savings because it gives you more time to save while reducing the cost of your retirement.
Following the three above tips can help you get the most out of your 401(k) and be better prepared for retirement. If you're not able to contribute any money right now due to a loss of income, don't panic. Just keep these strategies in the back of your mind and revisit them when you're ready to craft your new retirement savings plan.