A 401(k) could be your ticket to a comfortable retirement, especially if your company matches some of your contributions. But just owning one of these accounts isn’t enough. You also need to take the following steps if you want to squeeze the most out of your 401(k).
1. Make sure you’ve opted in
Just because your company offers a 401(k) doesn’t mean you’re automatically enrolled in it. Some companies require employees to manually opt into the 401(k) program. If you don’t, you won’t have any money withheld from your paychecks for retirement.
Others limit who can enroll in the program. They may require you to work for the company for a certain number of months before you can join the 401(k). In that case, you should have a backup plan — perhaps saving in an IRA — until you’re eligible to open a 401(k).
2. Review your investment options
Most 401(k)s give you a choice between various mutual funds, but you must decide which ones are right for you. Take some time to look over all your options, including the stocks in each fund, its historic performance, and its fees. Fees are often written as an expense ratio — a percentage of your assets — rather than a flat dollar amount, so look out for that. Try to keep your costs under 1% of your assets per year whenever possible.
If you’re investing in a target-date fund for the year you plan to retire, make sure you choose the appropriate target year and pay attention to its glide path. The glide path determines how the assets in the fund change over time and when it reaches its most conservative allocation.
Once you’ve chosen the funds that make the most sense for you, make sure you follow through and actually invest your money. Some 401(k)s come with money market accounts (MMAs) and your contributions may go here by default if you don’t choose other investment options. MMAs don’t offer much interest on your savings, so this isn’t a great place to house the bulk of your retirement funds.
3. Understand the terms of your 401(k) match
Claiming your 401(k) match should be your top priority if you’re offered one. If you don’t know what your match is worth, now’s the time to find out. Usually, your employer will give you a dollar-for-dollar match or a $0.50-on-the-dollar match, up to a certain percentage of your income. Your company’s human resources department or your 401(k) plan administrator should tell you how its matching formula works.
Do your best to contribute at least enough during the year to claim the full match. If you get a raise or your company’s matching formula changes, don’t forget to reevaluate your contribution amount.
Learn about your 401(k)’s vesting schedule also. This determines when you’re eligible to keep your employer-matched funds if you leave the company. Some companies have cliff vesting schedules, which don’t allow you to keep any of your match until you’ve worked for the company for a certain number of years. Others have graded vesting schedules that gradually release your matching contributions to you over time.
Try to stay with the company long enough to become fully vested if you can. Otherwise, don’t count on keeping your matched funds. Make sure you’re saving enough on your own to cover your estimated retirement expenses.
The more you understand about your 401(k), the easier it is to put it to work for you. After you choose your investments and start making contributions, put a reminder on the calendar for yourself to revisit your 401(k) in a year. Take that time to review your investments and make whatever changes are necessary to keep yourself on track for retirement.
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