6 Tips For Managing Your 401(K)

You’re sitting there in the employee meeting amongst your work friends and the cute guy in the suit and tie is talking about vesting and investing – or are they the same thing? (They’re not) He’s wearing a vest. (You’re not) Should you be invested in something else if you’re not vested? (Or are you not investing?)

Really, it’s not as complicated as it seems. According to the Millennials + Money data sponsored by the Social Media giant, Facebook, only 33 percent of Millennials (ages 21–34) are satisfied with the way they are currently investing for retirement, and the majority aren’t saving at all. A 401(k) plan with an employer match can help jumpstart your savings. Here are 6 quick tips to help you manage the rules that come with your company match.

TIP #1: TAKE ADVANTAGE OF MATCH MATH

The employer match on your 401(k) plan is free money. But it’s also more than that. Long-term investment returns in the stock market usually average 7 to 8 percent, but with an employer match, it’s like boosting your returns to 10 percent because of the match math.  

Every company’s matching program is different and some don’t match at all, but getting one is the place to start if you aren’t saving already. Most companies offer a dollar-for-dollar match up to a certain percentage of your pay – usually 3 to 6 percent. The most common 401(k) match is 50 cents for each dollar contributed up to 6 percent of pay. That extra 50 percent is what can boost your returns because 20 percent of 50 percent is 10 percent.

TIP #2: UNDERSTAND HOW THE MONEY GROWS

Einstein called compound interest the Eighth Wonder of the World because of its ability to snowball over time. If you have time to grow your money (and even a 50-year old has more time than you think), then you can benefit from the exponential returns offered by compound interest.

In addition to the free money, the tax advantages of a 401(k) mean your money gets to benefit from triple compounding. That means there are three ways your money grows better:

  1. Every dollar you save reduces your current income tax bill by an equal amount. That’s why there’s a limit on the amount of money you can contribute. For 2017, the contribution limit is $18,000 a year unless you’re over 50, in which case the minimum is $24,000.
  2. Your take-home pay actually goes down by LESS than a dollar in proportion to what you’re able to save.
  3. Your money grows without being taxed on the returns it earns. And boy does it grow! If at the age of 25 you put in the $18,000 minimum and added nothing more and took nothing out, in 50 years’ time earning 10 percent, you’d have over $2 million. Don’t believe us?  Check for yourself using the U.S. Securities & Exchange Commission’s Compound Interest Calculator.

TIP #3: GET VESTED

Being vested in a 401(k) is NOT the same thing as being invested. All the money you contribute to your 401(k) plan is always automatically yours, meaning should you decide to switch jobs, you get to take that money with you. It’s the free money provided by your employer match that has to do with vesting. If you want ALL the free money, then you have to stick around until you’re vested. Once you spend enough time on the job, then all the free money plus your money goes with you when and if you leave.

TIP #4 LOCATE YOUR VESTING SCHEDULE

Federal regulations set the guidelines for company vesting, but your employer gets to pick the schedule: either immediate, gradual over a period of time or all at once when you have worked for them for a certain number of years. To find out what your company’s vesting schedule is, you can do one of two things:

  1. Ask your Human Resources (HR) representative for a copy of your 401(k) plan’s summary plan description and locate the section on “vesting.” The rules will be explained there and if you’re still confused, you can ask your HR representative to translate.
  2. Check your recent 401(k) statement. It will show you how much of your 401(k) balance is currently earned from employer contributions.

TIP #5: FIGURE OUT HOW MUCH MONEY YOU GET TO KEEP

There is a lot of information on the Internet about the best ways to save and invest for retirement and if you do a search, you’ll likely find articles that slam the 401(k) and explain why they’re not very good investments. Some experts argue that you’re better off investing in something else such as an IRA or a Roth. While a mix of investments can be a good idea, it’s almost always in your best interest to take advantage of the free money offered by your employer match, even if you know you’ll be leaving and you won’t be getting 100 percent of the match.

Let’s say you know you’ll be leaving your job before the year is over because your spouse has a career opportunity that means you have to move to Hawaii (lucky). According to your company’s policy, you’re not yet fully vested. So, how much money will you be getting?

Imagine the balance in your 401(k) is $80,000, and $20,000 of that is from employer contributions (free money). If you are currently 40 percent vested, that means you’ll get to take 40 percent of the $20,000 or $8,000. You will also get to take 100 percent of the $80,000. That means you’ll be walking away with $88,000 of savings to rollover into an IRA or Roth so you can keep the savings going.

TIP #6: GET AN INCOME

Once the money has been allowed to grow and accumulate in either a 401(k) or an IRA, the final step once you retire is to figure out how to turn that money into an income. It used to be that employers retired with a pension so the work of converting the savings into an income stream was done for you. Studies have shown that retirees who have the old kind of guaranteed pensions are happier than those who are relying solely on their 401(k) or investments.

Turning your 401(k) or IRA into an income doesn’t have to be hard. While these vehicles can be great ways to save and prepare for retirement, they only apply to an individual. People who are married will want to look at income solutions that can pay both of you an income for life, no matter how long you might live. Annuities have a long and illustrious history of providing people lifetime pensions and you can get one, too. By shopping around and comparing different annuity benefits offered by different life insurance companies, both you and your spouse can get a guaranteed retirement income for life.

Need help? We’re on standby to answer your questions and give free retirement planning feedback with no obligations and no strings attached. CLICK HERE for our easy form and you’ll be on your way to getting that income for life.

6 Tips For Managing Your 401(K)

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