Everyone wants to have an enjoyable retirement, and having the financial resources to retire when and how you want is a dream that most people share. Employer-sponsored retirement accounts like a 401(k) plan can be a crucial tool in helping you retire rich, and using your 401(k) can be a lot simpler than many think. Just by following four simple rules, you can make the most of your 401(k) and get on the path toward a richer retirement.
1. Sign up
You can't benefit from your 401(k) if you don't sign up. The paperwork you'll need to participate in your employer's retirement plan is generally part of a big packet of materials you get when you first start a new job, and so it's easy to overlook it in the rush of things to get done during your first few days. The sooner you sign up, the sooner you'll be able to start getting the tax benefits of retirement contributions as you build up your future nest egg.
Recently, many employers have started to make participating in their 401(k) plan the default option for new employees, requiring you to opt out if for some reason you don't want to be part of your employer's plan. This can simplify the sign-up process, but the downside is that the default contribution under such plans is sometimes smaller than is ideal. Even if your employer does make participating in a 401(k) automatic, it still makes sense to look at your options and make whatever changes are needed to take maximum advantage of the plan's benefits.
2. Max the match
One of the most important incentives to participate in your employer's retirement plan comes when employers offer 401(k) matching to their employees. With matching, your employer will contribute its own money on your behalf into your 401(k) account, but only if you make contributions of your own. These matching contributions are typically subject to forfeiture until you've worked for a few years at your employer, but you always get to keep your own contributions, and the employer match is free money if you work long enough at your job.
To max out your 401(k) match, you need to know how your employer structures the match. Typically, you'll get matching money up to a certain percentage of your salary, with 3% to 6% being a common number in many plans. It's smartest to set your 401(k) contributions at least high enough to get all of the available matching money, which in turn will supplement your retirement savings to the greatest degree possible.
3. Pick low-cost investments
One common complaint for 401(k) plans is that they have a limited range of investments. Typically, your employer will offer just a fixed menu of investment options, and you usually won't have the flexibility to go off the list and find your own investments yourself.
The key to long-term success is identifying the investment options with the lowest fees possible. Index mutual funds or exchange-traded funds are good choices when they're available, because they tend to track popular benchmarks and avoid the performance-sapping costs of active money management. Even if all of your 401(k) investment options are actively managed, looking for the lower-cost options in the types of investments you want will help you keep more money for yourself and have less go to the financial professionals running the retirement plan.
4. Boost your contributions over time
Contributions of 3% to 6% of your salary can be a reasonable way to start your 401(k), but you'll need to set more aside to ensure a richer retirement. Many advisors recommend saving 10% of your pay toward long-term financial goals, and even larger amounts of savings can help you prepare for retirement on an accelerated timeframe.
One painless way to boost your 401(k) contributions over the years is to wait until you get a raise to make an increase. That way, your take-home pay won't fall, and you'll be able to sustain your standard of living even as you put your retirement savings into overdrive. Gradually, you can get your contributions into double-digit percentages, and that will make retiring on your terms a lot easier.
401(k) plans can be intimidating, but they don't have to be. Follow these four simple rules, and you'll build up a retirement savings nest egg that will make your retirement a whole lot more enjoyable.
The Motley Fool has a disclosure policy.