A 401(K) is one of the most used vehicles for saving for retirement. If you are an employee, putting money in your 401(K) is one of the best ways to start your retirement plan.
Most American employers offer these plans that have tax advantages for the saver. The employee who signs up for a 401(k) agrees to have a percentage of each paycheck paid directly into an investment account. The employer may match part or all of the employee’s contribution. The employee gets to choose where the money is invested, but it’s usually in mutual funds that have a track record of good growth.
Advantages of a 401(k)
The biggest advantage is how it affects your taxable income. A normal 401(k) contribution is made with pretax dollars which lower your taxable amount for the year. However, when you withdraw the money once you retire, it will be taxable.
The ROTH kind uses after-tax dollars for the contribution, but withdrawals are tax-free.
Increasing contributions to your 401(K)
Take a tip from the financial playbook of high earners - put as much as possible into your 401(k) each year. For 2022, the maximum 401(k) contribution is $20,500. An additional catch-up contribution of $6,500 is allowed if you’re 50 or older. If you can put away the full amount each year from age 30, by the time you reach 65 you will have $3.5 million saved for retirement.
The later you start, the less you will have when you retire. These funds grow due to compound interest. So, the longer you save, the more you get at the end.
Increasing your income
If you are not yet a high earner, but you’d like to boost your retirement savings, consider starting a second stream of income specifically to fund your 401(k). You’d need the $20,500 each year. That’s $1708 per month. For many Americans that may seem out of reach, but there are so many ways to earn extra money today you just need to find one that you can do, and doesn’t take much to get up and running.
Entrepreneur.com has a list of 44 ways to make more income. Some require some skills, but many can be done by anyone. Once you have the goal and a plan, all it takes is commitment and consistent effort. You will soon have a healthy 401(K) growing steadily. It will take extra effort now, but when it comes time to retire, you will be able to relax and enjoy your third act in comfort.
Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. This material does not constitute an offer or recommendation to buy or sell securities and should not be considered in connection with the purchase or sale of securities.
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