When saving for retirement, it's not always easy to know where to start. The myriad of retirement plans available can be confusing. If you don't have a representative who can guide you and explain what funds and fees are within the retirement plan, you may give up and walk away. But wait! When you walk away, you are giving away free money and delaying your savings for retirement.
So, how do you start saving for retirement? You start saving for retirement by investing in your employer's plan as soon as you are eligible. Before becoming eligible, do research and educate yourself on the funds within the plan and the fees associated with that plan. Most employers will put your retirement savings into a Target Retirement Fund if you do not make an election. This could be the most secure option for you until you can research the available funds. However, don't stop there when determining the best return on investment for your retirement fund.
How to Become a 401(k) Millionaire
See my feature in How To Make Yourself a Retirement Millionaire.
Here are some things that you can do to educate yourself on your investment options:
Talk to a financial advisor.
Decide your risk tolerance (stocks versus bonds).
Call the funding organization or visit their website to compare the fund options.
After determining your risk tolerance and selecting the funds you want to invest your retirement savings in, INVEST in your future. The most crucial step is to act as soon as possible. Continue your education using the Retirement Planning Guide as I answer the most common retirement financial concerns.
Investing early will give you the best return on investment when you reach retirement age. If your employer offers a matching contribution, you reap the benefits of the free money received by the plan. Yes, I said free. When employers offer matching contributions to your retirement plan, they give you free money to invest in yourself. You also reduce your tax rate from year to year because your money is held in a tax-deferred savings plan. Now, how bad could a lower tax rate be? Find out more about reducing your taxable income from the Financial Industry Regulatory Authority.
Now that your retirement fund is created, how do you continue to grow your retirement fund? You can continue to grow your retirement fund by increasing your retirement contribution percentage or dollar amount whenever you receive a pay increase. Even increasing your contributions by 1% annually can add to your long-term savings, and you may not notice the difference when receiving a pay increase. Also, as you pay off debt and find that you have additional funds available in your bank account, think about increasing your retirement contributions. The return on investment you receive from your retirement fund will exceed the interest received from diverting the funds into a savings account.
Your retirement plan could contain $1,040,106* at the age of 65 if you start investing at 20 with a starting annual salary of $30,000. Yes, you can become a 401(k) millionaire! Calculate your options here at Bankrate.com.
This was calculated with a contribution of $1,800 per year and a current 401(k) balance of $0, 2% annual salary increase, and a 7% annual rate of return. The plan has you contributing 6% of your annual salary up to the IRS annual maximum of $18,000 and an employer match of 50% of the 6% contribution.* Bankrate.com
Originally published at https://www.harriscashcoach.com on April 15, 2021.