How Can You Maximize Your 401(k)?
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An important matter that needs to be discussed is whether you are making enough contribution to your 401(k) for the purpose of retirement. Your retirement nest egg represents the kind of life you would like to live in the years to come, and your 401(k) should play a major part in achieving that financial security.
To achieve a comfortable retirement, ask yourself: “How much should I contribute to my 401(k)?”
FIND YOUR 401(K) CONTRIBUTION
The maximum amount an employee can contribute towards their 401(k) in this year is $19,500 minus employer contributions. Although it might seem like a lot, consistent payments can help alleviate anxiety about retirement savings.
Starting young has the advantage of compound interest. A good starting goal would be contributing between ten and twenty per cent of your pay. Think about choosing automatic escalation which increases your donations every year by one percent. This incremental increase, timed with raises and indexed for inflation, keeps take-home pay erosion low while producing a decent-sized nest egg.
FIDELITY RETIREMENT SAVINGS RULES
Fidelity recommends saving ten times your salary by age sixty-seven (67). They have set these milestones:
- 30 – 1x salary
- 35 – 2x salary
- 40 – 3x salary
- 45 –4x salary
- 50 –6x salary
- 55 –7x salary
- 60–8x salary
- 67-10x salary
These benchmarks assume you will save forty-five percent (45%)of what you make at work, with Social Security providing the rest. Use these markers to consider if any changes are needed in how much you are putting into the plan.
REASONABLE EXPECTATIONS FOR RETURNS
While some expect annual returns of between ten and twelve percent (10%-12%), it may be wiser to plan on lower ones such as seven percent or less. Historical return may not be achieved in the future, if stock and bond prices are any indication. By being conservative in your planning and saving more you avoid leaning too heavily on high returns.
START RIGHT NOW
This timing can affect how much you save for retirement. A contribution to a 401(k) plan should be at the top of a list because of its tax advantages. Starting early gives compound interest longer to build up your money. You can start with small amount that will gradually grow into substantial contributions.
WHAT IF TEN PERCENT IS TOO MUCH?
At least contribute enough to get the company match if you have trouble saving. For instance, if your employer matches fifty percent (50%) on the first six per cent (6%) of your pay and you earn $50,000 per year then by contributing six percent (6%) or $3,000 it would be an extra $1,500 for you. Although $3,000 might seem like a great sum, it is around $115 each paycheck. Look for ways to reduce spending or adjust budgets so that retirement savings assume more importance.
IN SUMMARY
Ramp up your 401(k) contributions after forming a habit of saving money gradually. Use auto-escalation , trim fat wherever possible and consider ways to increase income . For instance opening one solo 401k from your side hustle could give favorable tax status plus higher retirement savings.
Guidelines provide a starting point; however the more that goes into your 401(k), the better off you will be when retiring. Make this commitment towards shaping your financial future; trust me , you won’t regret it!
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