Being able to save for retirement in a 401(k) is far from a given. Plenty of companies don't offer these plans to their workers.
But if you have access to an employer-sponsored retirement plan through your job, it's important to take maximum advantage of the benefits it can provide. Here's how.
1. Snag your full employer match
Most companies that offer 401(k) plans will match workers' contributions to some degree. And if you're able to claim your employer match in full every year, it could really help you grow your nest egg.
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Let's imagine you work for the same company for 30 years and get a $3,000 match every year during that time. Off the bat, that's an additional $90,000 for retirement.
But that doesn't factor in the growth of the investments in your 401(k). If your plan offers reasonably good fund options and you make savvy choices from among them, you might generate an average annualized return of 8% over the years. (That's actually a little bit below the stock market's average rate of return, but as investors, we have to account for fees, too.) In that case, the $3,000 a year you get from your employer over three decades would actually grow into around $340,000.
2. Minimize your investment fees
One downside of 401(k)s is that they generally don't let you invest in individual stocks. Rather, you'll be limited to a specific set of mutual funds and exchange-traded funds, all of which charge annual fees. But you can keep those fees to a minimum by loading up on index funds.
Index funds are passively managed, and their goal is to perform as well as the benchmarks indexes they're tied to. Because of that, their expenses tend to be low, and many of them have strong track records.
Take S&P 500 index funds, for example. Over the past 60 years or so, that index has delivered an average annualized return of 10.5%, accounting for both strong years and weak years. If you concentrate your 401(k) portfolio in a fund that tracks that index, you might enjoy similar performance.
3. Pump at least some of your money into a Roth
Not every company that provides its employees with a 401(k) offers a Roth 401(k) option. But if your employer does, it can pay to route at least some of your contributions into this type of account. While those contributions won't get you the up-front tax breaks that are a feature of the traditional 401(k), you won't have to pay taxes on your Roth 401(k) withdrawals, which should give you more financial flexibility during retirement.
Furthermore, no matter what type of 401(k) you have, once you turn 72, you'll need to start taking required minimum distributions from it. The only specialized retirement account that has no required minimum distribution is the Roth IRA. But if you have funds in a Roth 401(k), you can rest easy knowing that those distributions won't add to your tax burden.
Build up your savings
Your retirement expenses could end up being a lot higher than you expect, so the more you are able to maximize the size of your nest egg, the less stressful your senior years are liable to be. Making full use of all the benefits of tax-advantaged retirement accounts is a great place to start.
