Thinking of starting your first 401(k)? Congratulations! Saving for retirement is a tremendously important step towards securing your financial future. A few tips to get you going:
1. Don’t worry too much about getting your 401(k) strategy exactly right from the beginning. Just start!
When it comes to your first 401(k), try not to let the perfect be the enemy of the good. In other words, figuring out the perfect retirement savings strategy up front is far less important that simply getting started.
The truth is, the biggest mistake that new retirement savers make with their 401(k) is putting it off instead of starting as soon as possible. You might tell yourself that you can simply make larger contributions to your 401(k) later, but the fact is, delaying costs you big time in terms of investment returns. Spare yourself the stress of playing catch-up as you approach retirement age. Get started now and let time and compound investment returns do the hard work for you.
2. Boiled down, the “ideal” 401(k) strategy is really quite simple. Here’s what you need to know.
- When to start. As soon as possible. When it comes to saving for retirement, time is your best friend.
- How much to contribute. As much as you can. 401(K) accounts are designed to be maxed out, so always err on the side of contributing more. Start by contributing as much as you can (up to the allowable limit), then keep cranking on those savings, year after year.
- Auto escalate. If auto escalation is available, it is an option that you should always take advantage of. The reason is simple. Most people are under-saving so significantly for retirement that auto escalation provides a necessary adjustments.
- Include bonuses in your strategy. If you work for a company that pays bonuses, make sure that every year, as much as possible of your bonus is withheld, to put toward your 401(k) contribution for that year. You’ll “see” less of your bonus land in your checking account, but your future self will thank you for the sacrifice.
- When to “borrow” from your 401(k): Never. Resist the temptation to make early withdrawals against your 401(k). Make sure you have an emergency fund to use when the unexpected happens. Leave your 401(k) savings alone, to allow time to do its work for you.
If you adopt this strategy as a young person and stick to it, you have an excellent chance of getting where you need to go, in terms of saving for retirement. Of course, life is not perfect, so just get as close to the ideal as you can. Remember, you can always adjust your strategy as you go. For instance, if at the beginning you are not able to contribute as much as you would like, just do your best, and then lean into your retirement savings goal later, when your circumstances permit.
3. What if your 401(k) has an initial waiting period? Because time is of the essence when it comes to retirement savings, you don’t want to waste a moment, even if your employer-sponsored 401(k) imposes a mandatory waiting period before you can start to contribute. Make the most of the mandatory waiting period by opening an individual IRA and contributing the amount you would have put into a 401(k) during that time (up to the allowable limit). Building the discipline of saving is an important part of this. If you immediately allocate the maximum towards your retirement savings, regardless of the account, you won’t get used to having and spending that money. When the mandatory waiting period ends, it will be easier to max out your contribution; you won’t miss the funds at all.
4. When the time comes for you to roll over your first 401(k) – i.e. when you move on to another job – here are a few important things to remember.
- Whatever you do, do NOT miss the rollover period (usually 60 days); or you’ll likely be hit with tax penalties.
- Also, avoid the temptation of cashing out – it is almost never a good idea. Not only are there immediate tax penalties for early withdrawal, but you will also miss out on the continued tax-deferral of your 401(k) funds.
- Finally, be sure to choose a low-cost rollover retirement account option. Trying to grow your retirement savings is enough of a challenge without trying to do so in a high-fee environment!