4 days ago
This Is the Best Way To Contribute To Your 401(k)
Contributing to a 401(k) or other workplace retirement plan is a great way to save money so that you can retire comfortably when you're ready. One of the big advantages to saving this way is that you can 'set it and forget it.'
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But that doesn't mean you don't need to put some thought into how you contribute. Here's what you need to know about the best way to contribute to your 401(k).
Your 401(k) contributions should start as soon as possible. Even if you can't contribute very much, contribute something. The money is deducted from your gross pay before you get your paycheck, so you'll never miss it.
When you start a new job, start your 401(k) contributions immediately if you can. Some companies will enroll you automatically, so check to see if yours is an opt-out plan (meaning you have to tell your employer if you don't want to participate). If you are automatically enrolled, make sure the amount is what you want it to be.
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Many companies will match your contributions, up to a certain percentage of your salary. Some companies will match half of what you contribute, or 50 cents on the dollar, while others will match dollar-for-dollar. They may match up to 3% or 5% of your salary.
If you can, contribute at least as much as you need to in order to get the maximum match. The company match is essentially free money that your employer is giving you toward your retirement savings, but you have to contribute in order to get it.
Here's an example.
Suppose your annual salary is $100,000. Your employer offers a 401(k) plan with a matching employer contribution of 50 cents per dollar, up to 5% of your salary. This means that your employer will contribute half of what you contribute, but no more than $5,000 per year. If you contribute $5,000 per year (5% of your salary), your company will match that with $2,500 per year (half of your contribution).
If you contribute $10,000 per year, your company will match that with $5,000. If you contribute $15,000 per year, your company will match that with $5,000, since that's 5% of your salary, which is the maximum they will match.
Some companies will match 100% of your contributions, and the maximum percentage of your compensation that the company will match can vary. Check with your human resources department to see what your company offers.
The amount you contribute to your 401(k) is always available to you to rollover or withdraw (although a tax penalty may apply), but the company may impose a vesting schedule. Many companies will vest 20% of their contributions per year, so after 5 years, the company's contributions are 100% yours. But if you leave the company before that time, you will only get part of the company match money.
As important as it is to start early when you contribute to your 401(k), it's equally important to increase your contributions as you get older. This will help your 401(k) balance to keep pace with increases in the cost of living and will help you stay on track for a comfortable retirement.
When you get a raise, use part of the increase to boost your 401(k) contributions. For example, if you get a 4% increase in your pay, increase your 401(k) contribution by 2%, and get the other 2% in your check. Keep doing this until you are contributing the maximum possible amount, which is $23,500 in 2025 if you're under 50. If you're over 50, you can contribute an additional $7,500 for a total of $31,000. Those who are between 60 and 63 can contribute a total of $34,750.
While it's best to set your contribution amount and then forget about it (until you're able to increase it, of course) but you don't want to do that with your investments. Your asset allocation should change as you age. You can be aggressive in your 20s and 30s, but your investments should become more balanced in your 40s and 50s, and move to the conservative end of the investment spectrum in your 60s.
The reason you want to adjust your retirement portfolio as you age is obvious: you have more time to recover from a downturn when you're younger. Investments that can fluctuate 20 or 30% in either direction are fine when you're younger, because if you do experience a steep drop, you can wait for the market to rebound. A 25% drop in your 60s, however, could be devastating.
An easy way to manage your investments is with a target date fund. A target date fund is a mutual fund that includes positions that are tied to a specific date in the future. If you plan to retire in 2070, for example, you can choose a 2070 target date fund. This fund would have a fairly aggressive mix of investments, such as individual stocks or tech mutual funds, right now. Over time, the investments would shift toward more bonds and other conservative investments.
Note that you don't have to choose a target date fund that corresponds exactly with your expected retirement date. If you plan to retire in 2070 but you're comfortable taking a little more risk, you can choose a 2075 target date fund. Or, if you're more conservative, you can choose a 2065 target-date fund.
The single best way to contribute to your 401(k) is to simply do it. Start today and take advantage of the magic of compounding. Increase your contributions as you can, keep an eye on your investments and before you know it, you'll be heading for retirement with a nice financial cushion.
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This article originally appeared on This Is the Best Way To Contribute To Your 401(k)
