Making the Most of Your 401k

A 401k is a great way to save for retirement. There are tax benefits, several investment options, convenience, and if your company matches your contribution, you’re getting the impossible: free money. That’s why more and more workers are investing in a 401k. The problem, however, is that many workers are not getting the most out of their 401k’s because they don’t fully understand how it works and are unclear about their investment options. Consequently, they run the risk of ending up with a nest egg that doesn’t meet their retirement needs. Therefore, before you invest in a 401k, here are some things to consider:
Company’s Matching Policy: It’s common for a company to match a percentage of its employees’ 401k contributions, but it’s important that you know how much your employer matches. It could be 50% of your contribution, but oftentimes employer contributions are limited by the plan or by the IRS. It’s important that you find out how much your company matches so that you at least contribute up to the maximum that they do match.
Investment Options: 401k plans provide several investment options, such as money market funds, bond mutual funds, stock mutual funds, and your own company’s stock. It’s a good idea to educate yourself about your options so your 401k meets your needs. For example, it’s common to invest more aggressively when you’re younger and more conservatively as you get older. It’s also important to check into how often you can make changes to your investment plan. Some plans have restrictions.
Expense Ratios: Sometimes an investment with the highest return is not the best choice because it has a higher expense option. An expense option is a percentage of a fund’s average net assets that you are charged to compensate for administrative fees, management, recordkeeping fees and other costs. An investment with a lower return but a smaller expense ratio might be more profitable in the long run.
Vesting: If you leave your job, you keep the vested portion of your 401k. The money that you contribute is always 100% vested, but the money that company invests is only vested after you’ve been at the job for a certain amount of time, which depends on the company. Once you become fully vested, all the money in the plan is yours if you leave your job or retire.
Withdrawal: Generally, you can’t withdraw money from your 401k until you are 59.5 years old without incurring a 10% penalty tax. And when you turn 70.5, you have to start withdrawing money. However, there are some hardship exemptions, which include suffering a disability, death, certain medical expenses, paying for college, buying your first home, and avoiding foreclosure or eviction.
After being in this business for many years, I’ve found that clients are most concerned about the following financial matters: retiring comfortably, reducing the amount they pay in taxes, increasing their living standards, and putting their children or grandchildren through college. Properly managing your 401k can help you accomplish all these financial goals. If you would like to talk about your 401k or about finding solutions to any other important issues in your financial life, I offer a complimentary financial review to discuss strategies that will ensure you lead the kind of life that you desire. Contact me at (831) 801-4069 or [email protected].