4 burning questions to ask on 401(k) day

A 401(k) or similar employer-sponsored retirement account can make saving for the future much easier and more effective—if you’re doing it right.

Retirement tip of the week: If you have a 401(k) plan (or something at work) or have access to one, ask yourself a few important questions to make sure you’re maximizing its potential. If you don’t know the answers, look them up.

Having access to a 401(k) plan or a 403(b) or 457 plan depending on your line of work is a privilege, as not all American workers have access to these benefits. And not everyone who has access participates in one, perhaps because they are not registered, they do not know what benefits they offer or they cannot contribute at the moment.

Still, the potential benefits of these accounts should not be criticized. Employer-sponsored retirement accounts are tax-deferred, meaning contributions are made with pre-tax earnings, and many employers offer automatic contributions from the employee’s earnings, so they never see the money “missing” from their paychecks. Some companies are offering automatic increases so that the amount a person contributes increases each year, making it a painless way to save more.

Every time a person starts saving in a retirement plan, these investments grow with market returns and compound interest so they can retire.

Do you have questions about your own pension? See the MarketWatch column “Help me retire.”

However, there are a few caveats.

As companies celebrate National 401(k) Day, let’s take a look at how to use your 401(k) by asking these important questions:

Will I get a match?

Many employers offer a company match to employee contributions up to a certain limit (eg 3% or 6%). There are often vesting provisions, meaning employees have to work for the company for a certain number of years to keep those employer contributions, but if they follow the rules, it’s basically “free money.”

If your company offers a match, ask yourself what it is and how it works. Companies set up their matches differently. For example, an employer might say that the first full 3 percentage points match 100%, and the following 3 percentage points match 50%—in which case a person who contributes 6 percent to her 401(k) plan would be close to an employer match. to 4.5%

Not everyone can meet the match, but every little bit helps. If you can, try to contribute as much as the entire match, or to get as many extra benefits as you can.

How are my investments allocated?

One of the most important considerations with a retirement account is how your money is spent. The wrong asset allocation can ruin your hard-earned dollars. The right one doesn’t mean you’ll see your balance regularly (thanks to market volatility), but it can help you stay on track and reach your retirement goals.

Conventional guidelines suggest that small pension savers should invest aggressively, to the point of pouring their entire portfolio into stocks. The closer to retirement, the more conservative the portfolio should be, even though there should still be exposure to stocks (portfolios should continue to work for retirees for the decades they spend in retirement). There are many other factors to consider such as what type of investments your company is offering in the plan menu and your risk tolerance.

One easy way to track your asset allocation is to invest in a target date fund, which ties investments to a specific retirement year (ie 2030 or 2055) and automatically adjusts asset allocations as the years go by. It’s a simple approach, but it doesn’t suit everyone’s goals, so consider working with a financial advisor or ask the professionals at an investment firm where your portfolio is located and what’s best for you.

What am I paying for my investment?

Another important consideration: what you’re paying for your account. See what fees are associated with your retirement account, such as for managing the portfolio or for the underlying investments themselves. Fees can disrupt the growth of a 401(k) plan. One study found that most employers’ 401(k) plans charge less than 1% for these benefits administration and investment components, but the fees can be much higher. Again, assume your total spending is 1% of your assets – 1% of a $100,000 portfolio would be $1,000 paid into your retirement account each year.

In this regard, no plan is the same. If you’re not sure where to find this information, call your human resources department or the company that manages your retirement account and ask – it’s your legal right to do so under the Labor Department. If you do not already receive this information, ask HR or the account holding company how to sign up for these disclosures, as most plan participants are sent information about their accounts at least once a year.

Looking for more practical tips for your retirement savings journey? Read MarketWatch “Pension Hacking” Column

Is there a Roth component for my 401(k) benefit?

Some companies offer a Roth version of the 401(k), where investors contribute their after-tax dollars, but can withdraw the money tax-free (compared to a traditional retirement account, where the money is pre-tax and then taxed upon withdrawal). ). Employees may want to maximize their tax exposure later in life by splitting their contributions between root and traditional, but it’s hard to predict what your tax situation will be in 20 or 30 years, or how tax rates may change even in the future. decade.

Whether you’re close to retirement or far from retirement, it can be easy to guess: Young investors are often encouraged to keep at least some money in a pink account. Unlike those who will be later in life, someone nearing retirement may want to stay in a traditional account if they reach their peak income and have less taxable income after retirement.

Source link

Leave a Reply

Your email address will not be published. Required fields are marked *