Are millennials saving for retirement? According to a retirement savings and spending study, 31% of millennials are contributing to a retirement account and only about one third of Americans say they understand how a 401(k) plan works.
How much you should put aside depends on many factors, but the most important thing is to just get started. There are many ways to start saving for retirement. One common way to save for retirement is through an employer-offered 401(k) plan.
What is a Traditional 401(k)?
A Traditional 401(k) is a plan that allows you to set aside money from your paycheck into a retirement account and invest it. This will allow for the potential to grow your savings while you work.
The benefit of these contributions is you don’t pay tax on money you set aside or the growth in the account until you withdraw it in retirement. At that time your savings should provide a steady stream of cash flow during retirement.
How do I elect to contribute to traditional 401k?
If your company offers a 401(k) plan, ask them how you can defer an amount of your paycheck to the plan. For many plans you can go online to the website of your 401(k) administrator, and decide how much money you want to have taken out of your paycheck and put into your retirement account.
Note: Vanguard recommends aiming to save a total of 12% to 15% of your income for the long term, including the match. However, you can contribute up to $19,000 in your 401(k) (up from the $18,500 limit in 2018). So, if you’re motivated to save, you have plenty of room to do so.
Does your company match contributions?
Many companies will match your contributions, up to a certain percentage. For example, a company may match dollar for dollar contributions up to 6% of gross salary deferral. In this case if your salary is $50,000 and you contribute 6% or $3,000 to your 401(k) you would also receive a $3,000 employer contribution for a total of $6,000.
Contributing at least up to your employer match is often a good idea for employees. If you don’t take advantage of their matching contribution program, you’re potentially leaving money on the table that could positively impact your retirement down the road.
What do you do if you leave your employer?
If you leave your employer after contributing to your 401(k), and want to take it with you, there are a few options. Two common options are:
- Roll over your 401(k) into a new employer’s plan.
- Roll over the money into an IRA.
Each of these options has their own set of pros and cons, and it’s important to understand the differences associated with them. For example, rolling your 401(k) to a new employer’s plan will give you stronger protection from personal lawsuits and could allow you to borrow against the funds.
However, rolling your savings into an IRA could also be beneficial. IRAs often have a wider range of investment options and can be used for a “back door” into a Roth IRA.
How do you invest in your 401(k)?
The funds in your 401(k) can be invested, which is how they have to potential to grow exponentially over the course of your career. Many 401(k) plans have the option to invest in a target date funds. Employees often view target date funds as a positive option, because they’re set up to help you invest (and align your risk) according to your retirement timeline.
Although target date funds do have some benefits, it’s important to keep in mind that they also have some notable drawbacks, including:
- High fees
- May be invested in ways that don’t actually line up with appropriate risk tolerance for an investor
- Only plan to get you to the end-date on your target date fund, rather than to and through retirement
If your 401(k) plan has target date funds as an investment option, it’s worth looking into. However, it’s also worth looking at your other investment choices within the plan to make sure you’re making the best decision for your financial future.
Do you have questions about your 401(k)?
Working with a fiduciary advisor team can help. At Manchester Financial, we walk our clients through their 401(k) plan options. We also help them to balance their investments continuously, and align their retirement savings strategy with their long-term lifestyle goals. Ready to get started? Contact us today.