When it comes to saving for retirement, it’s important to be proactive. Do not leave your golden years up to chance and the hope that lady luck will smile upon you. Not only do you need to have the right type of retirement account, but you need to have the right investments in those accounts. It’s not enough to fill your 401(k) with cash and let it sit there until you turn 65. You’re going to need to do a lot more to ensure you have what you need to retire on.
The 401(k) Plan
One way that employers attract and retain employees is by offering benefits. One of those key benefits is the 401(k) plan. Not only can you make pre- tax contributions, but your employer can also match those contributions up to a certain percentage. As of 2013, your maximum contribution is $17,500 with a little more if you are over 50. That’s a lot more than a simple IRA. If you are starting a new job there is usually a waiting period before you become eligible for a 401(k) plan. The moment you are eligible you should max out your allowable contributions. Since you are putting pre-tax dollars into the account it reduces your taxable income. When your employer starts matching, well that’s just free money. Take everything you can get.
The Key to Having Enough
The key to having enough money in your 401(k) for retirement is time in the same job. The people with the really big retirement accounts are those who stuck with the same job for years. You lose way too much ground by changing jobs. Every time you change jobs you have to wait for the probationary period to be over before you are eligible for your new company’s 401(k). The waiting time depends on the company; it could be 90 days and it could be 6 months or more. The next thing you have to think about is the vesting schedule that comes with your account. Money that you have contributed is yours right away. Money or stock contributed by your employer vests over time and it usually goes by percentages. The longer you stay with the company the greater your percentage is until eventually, after a period of years you are fully vested and everything in the account is yours when you leave. So because of delays in the availability of a company’s 401(k) and the length of vesting schedules, every time you switch jobs you lose months if not years of money. The other nice thing about a 401(k) and similar accounts is the amount you can contribute. In a simple IRA you can put in only a couple grand, whereas in a 401(k) you can put in a percentage of your income and that can add up to be a pretty large sum of money.
It’s Just a Shell
What people don’t always realize at first is that a 401(k), or any retirement account is just a shell. You have to fill up the shell with cash, stocks, bonds, ETF’s, and mutual funds. Your employer may offer you stock options in their own company or they may offer cash or both. It’s important to diversify. People at Enron learned a hard lesson about diversification when the company went belly up. If your company offers stock options just make sure those options don’t make up a disproportionate amount of your retirement account. Most employers will offer a range of mutual funds as well to invest in. You choices are usually limited because the company still bears a fiduciary responsibility to its employees and they have to make sure they are not “helping” people invest poorly.
After You Leave
After you leave your company you get to keep the vested portion of your account. If you leave everything in the account you may be charged maintenance fees or the account may be liquidated and sent to you so the company does not have to be responsible for you or your account any longer. Probably the best thing you can do it to roll it over into an IRA. That will give you the most options as far as investments and there is no tax liability as long as the proceeds goes from one account to the next. It’s important that you not take the money out too soon. If you do take it out before retirement you will incur an IRS penalty of 10% and it will be taxed as ordinary income, so you will lose at least a third of your money by taking it out too soon. When you become eligible for any employer retirement account read up to make sure you don’t do anything that will incur a tax penalty.
A Final Thought
It bears repeating. Probably the most important things you can do to ensure you have enough for retirement is to take advantage of any employer retirement account offered, max out your contributions, and stay in one place. The amount of money you save by staying is significant. Invest wisely and don’t liquidate it prematurely.