Saving for retirement is one of the most important things that a millennial can do for their future. Even though retirement is years away, saving should start as early as possible. Early retirement without the worry of money may be ideal, but the truth is it takes hard work and a lot of time. Having a 401(k) is one of the dependable ways that you can build your retirement savings to reach your goals.
Time is one of the biggest components associated with building your retirement savings. As social security might not be available when millennials retire, there is even more reason to save as much as possible for retirement.
Start With an Employer Sponsored 401(k)
Not all jobs offer a 401(k), so ask if this benefit is available when interviewing. It is a common benefit and should be taken into consideration when accepting a job. One of the biggest appeals of a 401(k) is the tax advantages. Money is contributed directly from your paycheck before taxes are taken out, which aids in lowering the amount that is taxed on your paycheck, but, keep in mind, the money will be taxed when it is withdrawn.
Starting Early is Best
Start contributing as early as possible, even small contributions from each paycheck make will make a big impact in the long run. Every dollar counts as the funds will grow year over year. The earlier you start, the more time the dollars will have to grow, the higher the returns will be in the long run. Experts recommend investing at least 10% of your paycheck to be able to meet retirement goals, but it all adds up.
Employer Match
Something that everyone should be taking advantage of is the employer match. Organizations will often match contributions that you make up to a certain percentage. Some employers will match one-to-one with your contribution while others may choose to contribute at a partial ratio. Either way, as long as you are contributing, the amount a company contributes is essentially free money.
A good starting point is to allocate enough to receive the full employer match. By taking advantage of this opportunity, it can make a huge difference in the growth of your retirement account. Even if an organization does not offer a match, you should still contribute.
Portfolio Strategy
Depending on the plan, some 401(k) providers may allow participants access to an advisor at no additional cost. That advisor can help create and implement a portfolio strategy. Based on age and income, they can offer advice on contribution rate and investment selection.
Regardless of how you choose the investments in your 401(k), diversification is crucial. This will dramatically lower the overall risk of an individual’s portfolio while maintaining positive gains. As the 401(k) is growing it is able to handle more risk.
As you near retirement, take on less risk by adding more conservative investments. When your investment time frame is longer, your portfolio can be more aggressive. The market is volatile and does not always go up, but yearly returns are generally positive. Over time consider altering your investments toward a more conservative strategy.
As retirement approaches, the next stage is comprised of preserving. While selecting investments, be mindful of the expense ratios for each fund. There will also be some administrative fees, but that is dependent on the plan. If unsure of which fund to invest in or if there is no access to an advisor, start with a target date fund. As that date nears, it should automatically change your portfolio to become more conservative.
Pretax vs Roth 401(k)
Most 401(k) funds are withdrawn from your paycheck before taxes. This is not a way to skirt taxes, it is a way to defer taxation on the money until it is withdrawn during retirement. If available and retirement is still beyond the horizon, consider opening a Roth 401(k) instead.
Contributions are taxed before being deposited and, as such, will grow tax-free. The benefit lends itself to those who believe they will be in a higher tax bracket late in life as you are taxed in a lower bracket upon contribution.
Don’t Touch the Funds
It may be tempting to withdraw the funds but do your best to not touch them. They will be subject to a 10% early withdrawal penalty if you are under 59 ½ plus additional taxes. Even though there are certain circumstances when you can avoid the penalty, your money would no longer be in the market, missing out on potential gains. If you do plan on putting that money back in, you will also have to pay interest on that amount and have 60 days to do so.
Changing Jobs
Changing jobs is common, but do not let this cause stress. Most 401(k) plans allow the account to remain open after a job change unless the account value is very low. Another option is to roll the funds into a new 401(k) account, once established with your new employer, or rolled into an IRA. Although a lump sum withdrawal is an option, it will be taxed and penalized upon distribution if you are under 59 ½. The best option would be to leave the account where it is or roll it over in order to keep its tax deferred status.
If you have not done so already, open a 401(k) account and start contributing in order to reach your financial goals for retirement. The sooner you start saving the better. Time is on your side, but it needs something to work with, so open a 401(k) today and start saving for your future.
There are a number of options and investments available when starting your retirement savings. Our team of experts can help you navigate the murky waters of retirement planning. For more information, reach out to a financial advisor today.
Jacob Marcusen
Client Services Consultant
