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Make the Most of Your 401k Plan

Make the Most of Your 401k Plan

AUBURN UNIVERSITY, Ala. – One way to build wealth quickly is to take advantage of your workplace retirement plan where your employer matches your contributions on a dollar-for-dollar basis. Start early in your career investing through a 401k plan. It is one of the best things to ensure you set aside enough money to fund a comfortable retirement.

Isaac Chappell, an Alabama Extension human sciences regional agent, offers the following example as a benefit of a retirement plan.

“An employee who starts setting aside $100 a month when they are 21 will have more than $191,000 saved when they retire at age 65, assuming they earn 5 percent a year on their investments,” Chappell said. “A worker who waits until age 40 to begin saving would have to save nearly $350 a month to achieve the same result.”

Don’t let the prospect of having to decide how to invest your retirement money scare you. Participating is more important than selecting the perfect investments. Chappell says many plans include lifestyle mutual funds, with investment styles designed to match the age and expected retirement date of participants.

Employer Match Programs

Many employers offer to match employee contributions, up to a certain percentage of the employee’s salary. If your company matches contributions, and you can afford to take advantage of the full match, do so.

“Life doesn’t offer many opportunities to get a guaranteed 100 percent return on your investment, but this one does,” Chappell said.

Increase Contributions AnnuallyPiggy bank with 401k written on the side of it.

Gradually increase your contributions annually. Most people start small by setting aside 1 percent of their salary.  One way to build your savings is to increase the contribution by one percent each year.  If you can time the increase to coincide with an annual raise, you probably won’t notice the change.  Some plans let you make automatic annual increases in your contributions, up to a certain percentage set by you.  If your plan offers this option, consider taking advantage of it.

In a retirement plan, you choose how much money goes into stock mutual funds, bond funds and also cash accounts. Different investments will perform well in different years, but may throw the asset allocation of your account out of balance over time.  It is important to go back periodically and move money between funds to restore your original asset allocation. Some plans offer the option to automatic rebalancing, which save you the hassle.

More Information

For more information about your financial future, visit www.aces.edu or contact your county Extension office.

About Donna Reynolds