Credit: Shutterstock photoThe concept of saving for retirement is easy – simply put money into your 401(k) or investment account, find the suitable types of investments for you and let it grow. However, our minds can be our own worst enemy, preferring the gratification now rather than when we’re 65 years old and ready to enjoy life. Learn how you can master your retirement savings through your 401(k), most likely your largest wealth-building tool.
Starting Early
You’ve heard it a million times before and it stands true today: Starting your retirement nest egg early is extremely important. One of the main reasons starting early is important is you are allowing compounding to work in your favor. Compounding takes your earnings and reinvests them, allowing your retirement fund to grow quicker as time goes on.
Look at an example of someone who has started saving at 25 versus someone at 45. Each invested $1000 per year with an annual growth rate of 8%. The investor who started at the age of 25, would reach the age 65 with $259,056; the one who started at 45 years of age would have about $45,761 by age 65. This illustrates the importance of investing early and maintaining a healthy level of returns. (For related reading, see: Delay in Retirement Savings Costs More in the Long Run.)
Automatic Contributions
One habit to get into that will boost your retirement potential is automatically contributing to your 401(k) plan. There are a couple common ways to do so, with the first being a fixed dollar amount and the second being a fixed percentage. Starting an automatic deposit each paycheck will make saving for retirement easier because you never had a chance to enjoy the extra money in the first place and you don't see the money leaving your bank account.
Tax Benefits and Employer Matching
You should be contributing to your 401(k) plan because it utilizes pre-tax dollars. The significance of this is any amount you contribute is deducted from your income before taxes, reducing your tax burden for the year, and growing tax-deferred until you start withdrawing money in retirement, when the money will be taxed as income. Your plan provider may also offer a Roth option, which uses post-tax dollars and allows your earnings to grow tax-free. Find what fits you best and begin using these tax benefits.
Utilizing your employers 401(k) is something you should take full advantage of. Not only will it instill solid saving habits, if your employer matches your contributions, that is free money you should never leave on the table. Matching programs give you even more incentive to save and contribute at least the matching maximum. Consult with your human resources department to find out if your employer offers a matching contributions.
The benefits of saving early for retirement shouldn’t be underestimated. Time is your largest asset and can really work in your favor. Setting up automatic contributions can make the process painless by saving money before you have a chance to spend it. You can also take advantage of the tax benefits of utilizing a 401(k) plan. Starting now will pay huge dividends later, allowing you to enjoy the golden years of life.
(For more from this author, see: 4 Investing Mistakes to Avoid.)
This article was originally published on Investopedia.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
