Financial planning for retirement is not an easy task and many mistakes can be made along the way when it comes to financial retirement savings and investing. For many people who work for companies that offer it, the 401(k) plan is one of the easiest and better retirement saving plans available to help them supplement their Social Security benefits when they retire. Unfortunately, many investors make mistakes with their 401(k) plan and don’t get the most return possible from their investment, and the difference in their nest egg could mean the difference between having a financially secured retirement or having to work when you should be enjoying your retirement.
Here are a few steps to take to maximize the potential return from investing in a 401(k) plan:
1. Sign up with your employer’s 401(k) plan: Believe it or not there are many people who have never considered or actually refused to sign up to participate in their employer’s 401(k) plan. This is a costly mistake. What most people don’t realize is that a 401(k) is a retirement saving plan on auto-pilot that your employer offers and is a very convenient way to build up your nest egg for retirement. All contributions you make will not only reduce your taxable income for the year but will grow, along with any gains, tax-deferred until retirement.
Most companies also offer matching contribution as a way to encourage their employees to save for retirement. The match can be as much as 100% of up to 6% of your contribution. This is free money and you will come out ahead even with a mediocre return from the investment with your 401(k) plan.
The sooner start investing in a 401(k) plan the better, since you won’t have to save nearly as much of your own money taken out from your paycheck to reach your retirement goals.
2. Take advantage of your company’s 401(k) matching contribution: A great benefit of investing in a 401(k) retirement saving plan is the employer match. When you contribute money to your 401(k), your employer as the opportunity to match what you put in. Each employer contributes a different percentage of what you put into the plan, depending how they set up their plan, and not all employers offer the match. An employer can match up to 100% for up to 6% of your income. For example, lets say you make $50,000 a year and your employer matches up to 100% of your contribution and you contribute the maximum 6%, or $3,000, of your paycheck into the plan, your employer will match 100% of that 6% contribution and add $3,000 into your retirement account. That is free money! A 100% return on your investment of $3,000. If you contribute only 3% of your salary to your 401(k) plan, you will still get $1,500 but you are basically turning down $1,500 in free money. That just does not make financial sense when it comes to planning for retirement needs. The difference of a thousand dollars or so over the span of a few years will have a huge impact on rather you will have enough money to meet your retirement needs.
3. Take more risk with your 401(k) plan’s investments. A common mistake many new participants in 401(k) plans make is being too conservative with the investment of the money, investing in bonds and money market funds instead of growth stocks. This seems to be the case with young people earning lower salaries than with older people making more money. Fear of losing your money is understandable. However, studies have shown that over the long term, after 20 years or more, more aggressive portfolios provide a significantly better return than portfolios that have no risk or low risk to meet your retirement goals. This is the case as most financial experts agree that investments go though cycles and that even if your investments take a hit or two along the way, over the long term, time will allow your investments to recover and grow. This doesn’t mean you should be reckless but you should take some calculated risks with you retirement investment plan funds, especially early in your days, to maximize your potential returns. You should review your investment portfolios at least once a year to balance the risk reward ration.
When it comes to your financial retirement, a 401(k) plan is an easy and valuable retirement tool that can help you meet your retirement goals. The sooner your start investing in a 401(k) plan and maximize the benefits from it, the sooner you should see your retirement goals met and just maybe allow you to retirement earlier then your have planned.