For many people, a 401(k) is their main means for saving for retirement. Whether you have been contributing to your 401(k) for years or this is the first time you will be investing in your plan, it’s important to make sure to get the most out of it. Here are some tips designed to maximize the long-term growth of your 401(k).
Take Advantage of Your Employer’s Match
Maximizing your employer’s 401(k) plan match is one of the most important retirement strategies you can do. If you don’t contribute as much as your employer is willing to match, you are turning down free money. For example, if you earn $75,000 per year and your employer will match 401(k) contributions up to 5% of your salary, that’s an extra $3,750 in your pocket.
Proper Asset Allocation
Properly allocating your contributions is key to getting the most out of your 401(k). It’s important to know how much should be invested in stocks and how much should be in bonds. A good rule of thumb is to subtract your age from 110 to determine the percentage of your portfolio that should be invested in stocks, with the rest in bonds or fixed-income investments.
Don’t Sell Stocks When the Market Crashes
Bailing out of stocks at the wrong time can be costly. Panic-selling is the worst thing you can do to your long-term retirement plan. Volatility happens in the stock market, but don’t give into the temptation to sell. Instead, use this as an opportunity to re-balance your portfolio or consider buying more stocks while prices are low.
Increase Your Contribution Rate Over Time
Common practice is to put at least 10% of your salary in your 401(k) each year. If this seems like more than what you can defer, start with contributing at least enough to receive the full match from your employer. Then, increase your contribution rate by 1% each year until you are putting 10% of your annual salary into your 401(k).
Consider Roth 401(k) Contributions
The majority of 401(k) contributions are pre-tax assets, meaning your contributions go in before they are taxed lowering your taxable income. However, when you start withdrawing money in retirement you will have to pay taxes based on your current tax rate at retirement. This can lead to large tax bills and financial concerns for retirees living on a fixed income.
Fortunately, more and more employers are offering Roth 401(k)s as a retirement savings plan. A Roth 401(k) is a post-tax retirement savings account, meaning your contributions have already been taxed before they enter your account. You don’t get the immediate tax break on these contributions, but your withdrawals in retirement on the money you put in and its growth will be 100% tax-free. This is a great way to reduce your tax bill in retirement.