When you look at the balance in your 401k account, do you start to get depressed? Do you panic and worry that you’ll never have enough saved to retire and enjoy the finer things in life? If so, you’d better start whipping your retirement savings into shape! Here are some tips to help you make the most of your 401k.
1. Participate. I know it sounds like common sense but millions of people who have access to a 401k plan are not taking advantage of it. If you don’t put anything in then you can’t act surprised when there is nothing there to take out. And the sooner you start contributing the more time your money will have to grow. If you know anything about compound interest, you’ll know that even a few years of procrastination can have a huge impact on your savings.
2. Take the Company Match. Many companies will match a certain percentage of your contributions. For example, let’s say they match 50% of your contributions up to 6% of your salary. That means that while you’re contributing only 6% of your salary, a full 9% is being deposited into your account. That’s free money and you’d be a fool not to take advantage of it.
3. Leave it Alone! Your 401k is meant to be used for retirement savings, not as an ATM machine. Yes, there are loans and hardship withdrawals that allow you to take some funds out, but you should only do so after exhausting all other avenues. Anytime you take money out of your 401k, you’ll miss out on all the earnings those funds could have accrued.
4. Diversify. Your 401k plan probably has a dozen or more investment funds to choose from and I don’t blame you if you can’t make heads or tails out of the selections. But you need to take the time to learn about them so you can diversify your funds to maximize growth potential while minimizing risk.
For example, if you invest everything in a money market fund your returns will be minimal and you’ll never have enough to retire. But if you invest everything in risky company stock you could lose it all. You have to find the right balance to meet your individual needs, which is easier said than done. Fortunately many 401k plans include age-based funds which will automatically adjust their allocations as you get closer to retirement age.
5. Take it With You. Far too many people cash out there 401ks when they change jobs and that’s just a bad idea. Not only will you pay taxes on your distribution, but if you cash it out early then you’ll have nothing left when you need it. 401ks are portable, which means you can take them with you when you leave a job. You can either roll them into a 401k with your new employer, or into an IRA. Either way your money will continue to grow until you are ready to retire.