A 401(k) is one of your most essential financial strategy components. While many think of their 401(k) merely as a workplace benefit, proper 401(k) management is vital to your retirement plan.
In this article, we’ll look at three personas to illustrate the best 401(k) management practices in different career stages to help you maximize your retirement savings' financial benefits and potential.
A 401(k) is an employer-sponsored retirement savings account that allows pre-tax contributions from a worker’s paycheck. You decide how much to contribute, and the funds are invested, typically in mutual funds, to grow over time for use in retirement.
Many employer plans offer to match your 401(k) contributions up to a certain limit. This benefit can boost your balance significantly and help you build a nest egg without sacrificing your current lifestyle.
Using your 401(k) wisely throughout your career is essential. Putting money into it regularly and making smart choices about where to invest it can help your savings grow over time with the help of your job. It’s never too early (or too late) to utilize your 401(k).
Meet Sarah, a 25-year-old college graduate just starting in the professional world. As recommended by her parents, she immediately enrolls in her company’s 401(k) plan and begins steadily contributing each pay period.
When Sarah changes jobs after two years, she rolls over her 401(k) balance to her new employer’s plan right away. She avoids the temptation to cash out her account or, even worse, forget about her contributions and leave the funds behind.
Every year matters for a 401(k). Many young professionals believe they’ll have plenty of time to make up contributions as they progress in their careers. Contributing to your 401(k) in your 20s rather than waiting until your 30s or later harnesses the power of compound interest, ensuring more significant retirement savings over time.
David is a 35-year-old professional who has contributed to his company’s 401(k) for years. However, when he changes employers, David decides to take a 401(k) distribution to help cover relocation expenses associated with his new job rather than rolling over the funds.
Unfortunately, this decision significantly shrinks his retirement savings balance.
David could have avoided this costly mistake with proper planning and financial guidance. An emergency fund separate from your retirement account can help avoid early withdrawals. Learning about the penalties and tax implications associated with early 401(k) withdrawals may also encourage you to seek other options when faced with a similar dilemma as David.
Meet Janet, a 55-year-old executive preparing for retirement in the next five to 10 years. Throughout her career, she has consistently contributed the maximum amount to her 401(k) and wisely invested the funds.
For example, Janet diversified her investments across various asset classes like stocks, bonds, and mutual funds. This helped reduce her risk while enhancing her long-term growth potential. She took more risks when she was younger and gradually shifted to more conservative investments as her golden years approached.
Janet is focused on protecting her substantial 401(k) balance while still growing it moderately as she approaches retirement. She’s also focused on maintaining an emergency fund outside her 401(k) to cover unexpected expenses and avoid early withdrawals.
While Sarah, David, and Janet are in distinct career phases, they share a common need. They all must make wise decisions in managing and investing in their 401(k) as part of a holistic financial plan. Making the most of this tool at every stage can lead to less stress and more financial freedom come retirement.
No matter where you are in your career, diligently contributing to, monitoring, and managing your 401(k) is essential. With the right strategy, your 401(k) can grow steadily throughout your working life to provide retirement security.
Planning for retirement can be overwhelming. At New York Life, we offer tools such as retirement calculators and alternative retirement income options that can help.
This article is provided for general informational purposes only. Neither New York Life Insurance Company, nor its agents, provides tax, legal, or accounting advice. Please consult your own tax, legal, or accounting professional before making any decisions.
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