Retiring on Social Security alone isn't an idea that should excite you. With the average retired worker today collecting just $1,918 a month, or roughly $23,000 a year, those benefits aren't a lot of money to live on by themselves.
That's why it's so important to build savings of your own. And if you have access to a workplace 401(k), you may be inclined to sign up for it.
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The nice thing about 401(k)s is that contributions are taken as payroll deductions, so they happen automatically. Not only do you not have to think about them, but with this system, you're more likely to stay on track (as opposed to an IRA you have to remember to write a check to).
But if you're going to save for retirement in a 401(k) plan, it's important to make the most of it. Here are some of the savviest moves you can make.
1. Claim your full employer match
It's not a given that your 401(k) plan comes with an employer match. But if it does, you have a prime opportunity to snag free money that could be instrumental in growing your nest egg.
Remember, the $2,000 or $3,000 match you get this year isn't just worth that exact sum. Any funds your employer puts into your 401(k) can be invested.
A $3,000 match today could be worth $30,000 in 30 years' time if your 401(k) is invested at an average annual 8% return, which is a bit below the stock market's average . So don't give up a single dollar of that money.
2. Choose index funds to invest in
Many 401(k) plans will dump you into a target date fund if you don't choose your own investments. These funds can be a simple way to invest for retirement, but they're not necessarily the best choice -- notably, because they may invest your money too conservatively, all the while charging you costly fees.
A better bet? Take an active role in your 401(k) investments, and lean toward index funds , which have the aim of matching the performance of the various market benchmarks they're associated with. A mix of index funds could result in higher returns than a target date fund, and at a fraction of the cost.
3. Go for a Roth
Many 401(k) plans today offer a Roth savings feature. And there are many benefits to choosing a Roth over a traditional 401(k).
For one thing, any gains in your account are yours to enjoy tax-free. Withdrawals are also tax-free, which lifts the burden of worrying about the IRS taking a chunk of your savings at a time when you're trying to maximize your nest egg.
Also, Roth retirement accounts do not force you to remove a portion of your balance year after year in the form of required minimum distributions . This gives you more flexibility with your money later in life.
A 401(k) could be a great savings tool for your retirement money. But make these moves to help ensure that you're getting the maximum benefit out of your retirement plan .
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