Maximize your 401k
One of the most important ways you can influence your comfort and security in retirement is to save properly into your employer's 401k or similar retirement plan. A sobering number of people save little or nothing into these plans, leaving them with low assets and vulnerable to rising costs in retirement. Social Security is not enough to get you through retirement - you NEED properly invested assets to see you through the decades of retirement.
Clients ask us all the time how they can best make use of these plans, and here are the first 3 CRITICAL 401k rules:
Almost no matter what, contribute enough to get your employer's match. This is free money you can't walk away from! Hopefully you, and everyone you know, is already doing this.
The next consideration is related to your personal debts. If you are paying debts with high interest rates (certainly anything over 10%, but really much over 7%), you should eliminate those debts before putting more into your 401k. If you are in debt, you need a strong and determined budget plan with a clear debt paydown process. Postpone your additional contributions until the high interest debt is gone.
An important lifelong rule is don't cash out your retirement plan when you change jobs! I see this much too often, where people use those funds to manage expenses and debts when they change jobs. This is a crucially important step in maintaining your retirement plan balance for the "old you" that will need those funds. Hands off the 401k!
For those of you who have mastered those critical steps, here are 3 steps to take next:
Invest sensibly. You are wise to use the target-date funds that your employer probably provides - For example, if you are 42 years old, you will be 67 in 2050 - the 2050 Target Date Fund would be a great choice for you if you are expecting a "normal" retirement date in your mid-late 60s. Making emotional decisions to change your investments based on scary headlines is one of the most damaging moves you can make for your future wealth and security, so once you make your sensible investment choice - Hands off the 401k!
Increase your contributions- In the perfect world, you should contribute about 15% of your gross salary into retirement each year for several decades of work. That can feel like a daunting number! So here's a gradual strategy - start with the employer match, and every year increase your savings percentage by 1 or 2 %. Doing this each time you get a raise will help you increase your savings rate to level that will work for you. But don't go into debt doing this!
Consider Roth contributions - If you are doing a good job saving at least 10% of your gross earnings into your retirement plan, and leaving it invested properly, you might shift some of your contributions to Roth or after-tax contributions. What is the advantage? Those funds will grow Tax-Free for the rest of your life! What's the disadvantage? Your upfront tax deduction on contributions will be lower, so your paycheck will be a bit smaller.
It might a challenge to figure out your best personal plan here - most people benefit from engaging a fee-based financial advisor to help them make a clear plan that includes budgets, savings, tax strategy and investment plan during your working years. Anyone approaching retirement almost certainly needs a consultation with an advisor to understand your personalized retirement timing, withdrawals, and strategies. As you interview advisors, you will want to understand how the advisor is compensated and whether they are charging you a fee or selling you a product. No one works for free, so be sure your goals are aligned with your new advisor.