401(k): Time is on Your Side
Your employer’s 401(k) plan is designed to help you invest in the future. Use these five tips to make the most of that plan while time is still on your side.
For many working Americans, one of the benefits likely provided by your employer is the option to participate in a 401(k) retirement plan. Basically, a 401(k) is a “defined contribution plan” designed to help you invest for retirement. Often times, the employer matches your contributions to help you build a bigger nest egg.
The sooner you start, the more you will have. Here are five things to keep in mind:
1. Match Game
When evaluating a 401(k) plan, what’s your employer's level of participation?
The employer contribution to the 401(k) plan is free money to the employee. It can also be considered as additional compensation when comparison job shopping.
“One of the biggest mistakes young employees make is they don’t pay enough attention to 401(k) benefits available to them from their employer,” says Celandra Deane-Bess, senior wealth planner in the PNC Wealth Management®. “Mid-career people also need to pay attention to their 401(k) when they change jobs and analyze the 401(k) benefits afforded to them.”
2. Max Out
Contribute as much as your company allows to get the most from your employer.
A 401(k) plan is usually the first place an individual can begin building some real net worth.
3. Watch Your Money
Take advantage of online tools available to analyze your 401(k) investment performance.
“A lot of people don’t have the tools to analyze multiple 401(k)s for the best returns on investment,” says Ken Killfoil, senior investment advisor for PNC Wealth Management.
4. Annual Check-Up
A good rule of thumb is to check your 401(k) performance and asset allocations on a yearly basis.
People make mistakes by making too many changes to their fund allocations over time versus keeping a large percentage of the allocation for the long term.
“An annual or bi-annual upward adjustment to your contribution is a great way to boost your investments,” Deane-Bess said.
If you have multiple 401(k) plans, it is generally better to consolidate them into one plan, if you can keep the same or better plan conditions.
5. Roll Into Retirement
Most people will work for multiple companies before retirement. A new job often means a decision about your 401(k). By law, you must have at least 30 days to decide what to do with your 401(k) when you switch jobs.
If your new employer’s plan accepts transfers, one option is to roll over the money from your previous company. You won’t lose your contributions, your employer’s contributions if you’re vested, or earnings accumulated in your old 401(k). Your money also will maintain its tax-deferred status until you withdraw it.
Here’s an important reminder: “Fund expenses and investment choices need to be carefully considered before combining multiple 401(k)s,” Killfoil said. Standard payroll taxes apply to all 401(k) withdrawals.
Learn more about using 401(k) and 403(b) plans to save more for retirement »
Celandra Deane-Bess says employees should take advantage of 401(k) benefits
Ken Killfoil says it's important to review fund expenses with 401(k) rollovers
401(k) Golden Rule
When it comes to decisions about assets in your 401(k), here’s one guiding principle: Subtract your age from 100 and that’s the percentage of equities you should hold in your plan allocation.
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