Talk to most full-time employees saving for retirement, and you’ll find that an employer-sponsored 401(k) is the way most are planning for their golden years.
But while 401(k)s are common, they have some specific rules that can be confusing. And let’s face it — anything that has to do with long-term financial planning can be intimidating.
Thankfully, the basic premise of these accounts is easy to understand: Take pretax dollars out of your paycheck, invest them over many years and ultimately wind up with a decent nest egg come retirement.
Of course, the size of that nest egg can vary greatly based on a host of factors. So how can you make the most of your employer-sponsored retirement plan? Here are some 401(k) investing dos and don’ts:
The Dos
• Do start saving early, even if you don’t make much: Compound interest is one of the most powerful forces in the universe, so saving a little cash and giving it a lot of time to grow is often more effective than saving a lot of cash for a short amount of time. Consider two ways to get to $1 million by age 65: Sock away about $4,700 a year starting at age 25 and invest with a 7% rate of return … or save and invest about $23,700 a year starting at age 45. While it might be hard to save even a few grand at 25, it’s going to be just as painful to save a huge portion of your earnings in the prime of your life. At least in the former scenario, it eventually gets easier.
• Do take full advantage of your match: An extra incentive to save: employer matches, which essentially amount to free money. Your company puts a little bit extra in your 401(k), simply as a reward for saving — something you should be doing anyway. Don’t leave this on the table.
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