Your 401(k) or 403(b) accounts are a smart place to store your retirement money — there’s no disputing that. However, simply directing a percentage of your paycheck into it every month and expecting the culmination of funds to support you through your golden years is not enough.
You need to understand how your investments, the plan’s fees, and any employer match play into putting you on track for your retirement goals.
If you own a television (or have been near one at any point over the last decade), there’s a good chance you’re familiar with the phrase ‘Set It and Forget It’. In fact, it was this catchy slogan — popularized by Inventor and TV pitchman Ron Popeil — that grew sales for his Ronco rotisserie oven to well over 8 million units in the United States alone.
Here’s the thing, though.
While “set it and forget it” is a great idea in the kitchen, it is far less effective when it comes to your retirement savings. With that in mind, here are four key things to know to get the most out of your 401(k).
Contribution Behavior
A study carried out at Harvard and Yale revealed some astonishing financial behaviors in retirement-age participants.
In the study (titled $100 Bills on the Sidewalk: Suboptimal Investment in 401k Plans), employees over 59.5 years of age were unaffected by the amount their employers were willing to match in their 401(k) plans.
Not only did the participants ignore the amount of their employer contribution when deciding how much to contribute themselves, but they also did not show any significant changes in behavior if there was no penalty for early withdrawal.
On average, these employees missed out on $507 of “free money” by not taking advantage of their employer’s matched contribution.
So, what does this all mean? It means that if you are not participating in your company’s retirement plan, you are missing out on money.
Based on available research, there are two common reasons most people aren’t getting back as much as they should. The first is procrastination and the second is having too many choices within the plan.
Thus, if employees are given a deadline for signup and a reasonable number of choices, they are more likely to save.
Fortunately, you can make this work for you.
Set a Deadline for Yourself
It sounds easy to set a deadline, but many people don’t like to think about saving for retirement. They’re often caught up in the here and now of daily expenses, short-term savings, and emergency funds. However, if you want to get the most out of your 401(k) plan, you need to set a deadline for yourself and get the ball rolling.
This means that you should set a reasonable date to signup with your employer and begin making contributions. This will push you to start making contributions earlier. The sooner you start, the more you stand to gain down the road. A great time to do this is at the end of the year when you commit to your medical and other benefits.
If you already have a 401(k) plan, you’ll still need to decide when to start making contributions. For example, you could say, “I’m going to contribute 5% of my pay in my company’s 401(k) plan beginning in July.” Done! Now, go online and get it done!
Review Your Investment Choices
Every 401(k) plan gives you investment options, but no two plans are the same. You may have a lot of options to choose from or you might have just a handful. Either way, you should take the time to review what’s available to you and make an informed decision.
If you feel overwhelmed with too many choices, you don’t need to make a decision on your own. You can always reach out for guidance. Saving for retirement is extremely important, so you should never make any decision unless you feel well-versed in your options.
That said, if you’re comfortable making the selections on your own, go for it!
Maximize Your Employer Matching Contributions
Not all employers offer matching contributions, but if yours does, you should absolutely take advantage of it. Matched contributions are literally “free money” for your retirement. So, if you contribute the maximum amount possible to your 401(k) every year, you will get the maximum amount in matched contributions as well!
In addition to contributing the maximum, you should also start contributing as soon as possible. You can’t start taking advantage of matched contributions until you make contributions yourself.
So, what are you waiting for? Your Financial Mom is telling you to start now!
Pathfinder Planning LLC is a registered investment advisor in North and South Carolina. For more information, visit www.pathfinderplanningllc.com.