Company pensions are increasingly becoming scarce. Therefore, one of the vehicles that was available to the workers of previous decades are no longer accessible for most private sector workers. More and more companies are moving toward 401(k) plans as the primary retirement savings option for their workers. Here are some important points about contributing to a 401(k).
Open An Account
It’s impossible for a worker to save in a 401(k) plan if they’ve never opened an account. Getting set up with an account is as easy as taking a few minutes to stop by the HR office to fill out a few forms. Once an account is open, then it’s possible to start making contributions.
What’s a Good Start?
When looking at 401(k) contributions, it’s a good idea to invest at least up to the amount of any employer match that’s available. Some companies will not match the savings of their employees. Those that do, however, provide a great option for their workers to build their savings. Common levels of matching is $0.50 or $1.00 for every dollar contributed up to the the first 6 percent of an employee’s salary. Therefore, a person who makes $50,000 in a year could save $3,000 and receive the match, which would be $1,500 for a 50-percent match or $3,000 for a 100-percent match. This is a great way to multiply savings quickly without much in the way of risk. The match is basically free money.
What’s Next?
After hitting the level of the match, many financial experts recommend opening up a Roth IRA. There is no tax deduction when contributions go into a Roth, but they grow tax-free. They also come out tax-free when it comes time to retire because the IRS views the tax as having already been paid. As of 2019, employees under 50 years old can save up to $6,000 in an IRA account. Those who are age 50 and above can add another $1,000 to the $6,000 maximum.
What’s The Goal?
After obtaining the 401(k) match and filling a Roth IRA, it’s recommended that future retirees increase their savings until they are putting 15 percent of their annual salaries toward retirement each year. This can come from 401(k) savings, company matches, and IRA contributions. Not everyone will be able to save as much, but getting started is the key. Those who are able to save 10 percent should aim for 15 and work toward it. Those who are at 15 should aim to increase their savings as well. Progress over time will make a comfortable retirement more likely. Slow and steady improvements will work out better than waiting until age 60 and then starting to worry about retirement.