Over the past 10 years, you may not have noticed but there has been a quiet revolution transforming the 401(k) landscape. As a result, you’re probably saving more consistently and investing in a smarter mix of stocks and bonds without even knowing it. Employers have also been increasingly automating financial moves that you might otherwise drag your feet on – it’s not exactly a fun Saturday night in! Be honest, do you really remember to boost your contribution percentage every year?
401(k)s are playing an even larger role in Americans’ retirement preparations as old-fashioned pension plans, which require no action on your part, have become almost non-existent outside the public sector. Over the 35 years through 2013, the percentage of private-industry workers covered by a 401(k) and not a pension rose from 7% to 33%, according to the Employee Benefit Research Institute. The percentage who had a pension plan, either with or without a 401(k), fell from 38% to 13%. That makes it even more important for you to make the right moves with your 401(k). Note: Refer to a tax professional regarding potential tax benefits.
Consider contributing your raise. A big reason many people don’t save for retirement is that they can’t afford to part with a portion of their income up front. But if you received a raise, consider contributing that money to your 401(k) instead of spending it. It’s recommended that you should save at least 10% of each paycheck for the future, and if that’s not in the cards right now, start off by saving that raise and work on freeing up more money in your budget over time.
Are taking advantage of your employer match? You might be leaving money on the table if you aren’t taking full advantage of your employer match. If your employer will match your contributions up to 6%, but you are only contributing 4% – you are leaving free money on the table.
Playing catch up. If you’re 50 or older, you may be able to take advantage of the “catch-up” provision, which lets you put an additional $5,500 into your plan each year beyond the annual max.
Know the vesting schedule. Many companies have a vesting schedule with the company match in 401(k) plans. The company money doesn’t really become yours until you have stayed with the company a specific amount of time. Many plans don’t vest for three or four years, so before you hand in your resignation, know if you are vested or not.
Don’t forget about old 401(k)s. If you leave an old job, make sure you don’t forget about your 401(k). You worked hard to contribute to that 401(k), take care of all that money you saved, no one else will.
Have an emergency fund. An emergency fund is a great idea to keep from dipping into your retirement savings for unexpected issues. The next time the washer breaks or you need tires for your car – you won’t have to borrow from your 401(k) and then make sure you pay yourself back to avoid penalties.
Recognizing the need to put money away for retirement is the first step in starting a retirement plan. Understanding how much you want to sock away and finding creative ways to increase your contributions is the tricky part. Starting too late and saving too little are common regrets that you want to avoid. Making the effort now will help make your retirement something to look forward to and help you stop worrying about retirement. And always consult with a tax professional regarding tax benefits.
Paul A. McLaughlin, Jr
Senior Vice President, Chief Operating Officer