You shouldn't expect to live solely on Social Security once you retire. That's because those benefits will only replace about 40% of your pre-retirement income if you're an average earner, and most seniors need roughly twice that amount to maintain a decent lifestyle.
It's for this reason that workers are encouraged to save for retirement throughout their careers. And if you're in your 30s, you have a prime opportunity to set yourself up for a serious amount of retirement wealth.
This especially holds true if you have access to a 401(k) plan. While IRAs are an effective savings tool in their own right, the upside of saving in a 401(k) is that these plans come with a much higher annual-contribution limit. If you're in your 30s, here are a few smart 401(k) moves to make.
1. Claim your full employer match
Many companies that offer 401(k) access also match worker contributions, to some degree. It pays to take advantage of that full employer match, especially when you're young, because the extra money you receive is money you can invest for many years.
Imagine you snag a $3,000 employer match in your 401(k) this year and you're 30 years away from retirement. If your 401(k) plan normally delivers an average annual 8% return, which is a bit below the stock market's average, that $3,000 match alone could grow to over $30,000 by the time you're ready to tap your retirement savings.
2. Load up on index funds
One downside to saving in a 401(k) is that you generally can't invest in individual stocks. Rather, you're limited to different funds that employ a variety of strategies and charge different fees. Most 401(k)s, however, come with the option to invest in index funds.
Index funds are passively managed, and their goal is to match the performance of the different benchmarks they're tied to. The upside of investing in index funds is paying very little in the way of fees, whereas with actively managed mutual funds, your fees could be far more substantial. The less you spend on fees, the more wealth you'll build.
To be clear, choosing index funds over actively managed mutual funds won't necessarily mean shorting yourself on returns. Index funds commonly outperform funds that are actively managed, despite their hands-off strategy.
3. Open a Roth 401(k)
Though not every 401(k) plan offers a Roth savings option, a growing number are starting to. And it could pay to take advantage of a Roth account. Though you'll give up your tax break on the contributions you make, you'll benefit from tax-free growth in your 401(k) and tax-free withdrawals once retirement rolls around.
Furthermore, if you're in your 30s, you may not have reached your peak earnings -- which means you may be in a relatively low tax bracket. That alone makes the case for a Roth 401(k). That way, you'll pay taxes now at what could potentially be a much lower rate than the one you'll face later on in your career or during retirement.
Your 30s are the right time to focus on retirement savings. Make these 401(k) moves to set yourself on a path to long-term financial security.