If you want to go the extra mile toward your retirement goals this year, contributing to a 401(k) is something to consider. It’s one of the most prized possessions of many retirement savers.
Unfortunately, many plan participants have no idea if they are getting the most out of their 401(k). This could be dangerous when it comes to retirement planning. You could wake up one day and realize you don’t have enough money tucked away in your 401(k) for you to retire comfortably.
If you have a 401(k) or are considering contributing to one this year, here are a few tips to help you make the most of your account.
Define your long-term vision
When you’re planning for retirement, it’s important to develop a vision of what you want your life to look like during your golden years. Then you can estimate the costs and determine what steps you should take now to achieve that goal.
Let’s say you want to travel around the world and take on passion projects during retirement. How much would that cost? Once you have your big number, you can determine if you are saving enough money in your 401(k) to help you achieve that goal.
Determine your contribution goals
Now that you’ve developed a vision and identified potential costs, it’s time to think about saving money toward that goal. How much money do you need to save for the next 10, 20, 30, or 40 years?
Before you start your calculations, remember that the 401(k) comes with annual contribution limits. If you haven’t turned age 50 yet, you can contribute up to $20,500 from your pay in 2022. But if you’re 50 or over, you get a special annual catch-up contribution of $6,500, bringing the maximum contribution to $27,000.
Be strategic about your annual contributions. You can contribute the maximum or another amount that makes sense for you. If you’re 35 and want to contribute the maximum, you can tuck away approximately $854 every two weeks to achieve your goal in 12 months. But if you want to fast-track your success, you can choose to contribute a higher amount — say, about $1,500 biweekly — to max out your 401(k) within seven months.
You may not be alone on your 401(k) contribution journey. Your employer may give you extra money if you decide to feed your 401(k). That’s called a matching contribution.
Let’s say your employer agrees to match 50% of your contributions, up to 6% of your salary. Imagine you earn $90,000, and you contribute 6% of your salary, or $5,400 for the year. A 50% match means you would receive an extra $2,700 from your employer without doing more work.
Choose your investments carefully
The money that is automatically deducted from your paycheck to fund your 401(k) must be invested to grow. Here’s where it can get a bit tricky.
You might receive a menu of options to choose from, including:
It may be tempting to fill your 401(k) with conservative investments to reduce your perceived risk. However, this can hurt your long-term growth potential. You should review the investment choices, research the average returns, and align your investments with your risk tolerance and age.
If you need help, don’t be afraid to consult with a financial advisor. It’s also a good idea to check on your account every year to ensure your portfolio allocation makes sense for your goals.
Plan for your 401(k) success
The keys to crushing your 401(k) goals are to plan ahead and make educated decisions. This retirement account is loaded with benefits you don’t want to miss out on in 2022. Every dollar you contribute to your 401(k) can lower your taxable income for the year. In addition, you get to stash more money away for retirement.
Although a 401(k) might be a good start to retirement savings, it probably won’t take you to the finish like alone. That all depends on how much you invest, the performance of your investments, and your time horizon. As you put money away into your 401(k), think about other accounts that can serve as a companion on your journey. After you’ve crushed your 401(k) goals, you can look into an account like a Roth IRA (individual retirement account) to unlock even more retirement benefits.
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