When it comes to saving for retirement, you have choices. You could sock your money away in an IRA, or you could sign up for your employer's 401(k) plan.
Saving in a 401(k) is easy and convenient, and if you manage your account the right away, you may be surprised at how much wealth you're able to accumulate in it. Here are a few key strategies for making the most of your 401(k).
1. Always snag your full employer match
Many employers that offer a 401(k) plan also match workers' contributions to some degree. Put enough into your 401(k) to claim your match in full -- if you don't, you're giving up free money.
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Imagine your employer is willing to give a dollar-for-dollar match on up to 5% of your salary. If you earn $60,000 a year, that means you'll need to put $3,000 of your own money into your 401(k) to get the maximum of $3,000 out of your employer. That's a step worth taking since it means free cash for your senior years.
Keep in mind that your employer match may not be yours right away. Some companies have a vesting schedule that means you must be employed for a certain period of time to keep the matching funds. Pay attention to that schedule so you don't wind up forfeiting money.
2. Save your raises
Once you sign up for a 401(k), contributions are automatic. Since that money gets taken out of your paychecks before you see it, the temptation to spend it goes away. Saving your raises each year can thus be a solid wealth-building strategy. If you sign up to save that extra money right off the bat, you won't miss it at all, and it'll help you grow your 401(k) balance over the years.
3. Keep your investment fees low
Once you start putting money into a 401(k), you'll need to decide how to invest it. With a 401(k), you can't buy individual stocks. You'll be limited to funds, which charge fees known as expense ratios that can eat away at your returns. Keep your fees to a minimum without compromising your funds' performance. To that end, index funds are worth considering.
Index funds aim to match the performance of existing market indexes. For example, an S&P 500 index fund will try to mimic the performance of the S&P 500. When that market moves upward, so too will your retirement plan balance. Index funds are passively managed, so their expense ratios tend to be very low -- just a fraction of what you might pay for an actively managed mutual fund that employs an actual fund manager or team of managers. Index funds typically perform just as well as, if not better than, their actively managed counterparts.
A smart 401(k) strategy could be your ticket to the comfortable retirement you want. If you're new to saving in a 401(k), keep these pointers in mind -- they could help you amass a large pile of money over time.
