Save for Retirement
Many of the most talented and dedicated marketing and advertising professionals in the country are focused on persuading you to spend money and, if necessary, go into debt to do so. Every form of media that reaches you on a daily basis is specifically designed to encourage spending. In this consumer-driven environment, it takes determination to resist the constant pressure to spend recklessly and instead save money.
So, what sets successful individuals apart from those who struggle?
Successful people have a clear personal vision of what they want to achieve and why they want it. This vision provides them with the strength to stick to their strategies even when it becomes uncomfortable. It gives them the determination to persevere in the face of discouragement. This characteristic is also shared by entrepreneurs, which is why their small businesses thrive.
The Importance of the 401(k) Plan
The 401(k) plan has become the primary investment vehicle for individuals looking to save for retirement. However, many people fail to maximize the benefits of their plan, potentially leaving them with less when they retire. Here are some steps you can take to enhance your retirement savings and eliminate worries about whether you'll have a comfortable retirement or have enough time to spend with loved ones.
- Increase your contributions to the maximum amount you can manage. Many individuals contribute only enough to receive matching contributions from their company and then they stop. By adding more to your account beyond the matching contributions, you'll have a larger retirement fund.
- Instead of making small contributions from each paycheck, consider investing a lump sum at the beginning of each year. There's no requirement to invest in a 401(k) plan incrementally. By investing early, you give your money more time to grow and work in your favor.
- While money-market funds may be suitable for investors nearing retirement, most individuals in their 40s and 50s need growth in their retirement investments. Allocate more of your investment funds to equities and reduce the amount in money-market funds.
- Historical data indicates that small-company stocks tend to outperform large-company stocks over extended periods. Consider shifting a portion of your equity investments into funds that focus on small companies, aiming for at least 25 percent of your U.S. equity investments.
- Numerous studies have demonstrated that value stocks consistently outperform growth stocks. Large U.S. value companies, for example, have had a compound rate of return of 15.1 percent compared to only 11.4 percent for large U.S. growth companies since 1964. Allocate at least 25 percent of your U.S. equity investments to a value fund if available.
- Rebalance your portfolio annually to maintain the desired asset allocation. This practice ensures that your investments remain balanced and accounts for the possibility that assets that performed poorly in the previous year may rebound in the current year. Failing to rebalance can increase the risk in your portfolio over time.
- Opt for funds in your plan with the lowest operating expenses while maintaining proper asset allocation. Look for funds with low portfolio turnover.
- Avoid borrowing or making early withdrawals from your 401(k) unless it's a last resort for a life-threatening emergency. Early withdrawals before the age of 59.5 are subject to a 10 percent tax penalty, in addition to regular taxes, unless you are disabled. It's best to refrain from this action.
- If you change jobs, consider rolling over your 401(k) into an Individual Retirement Account (IRA). An IRA offers the same tax advantages as a 401(k) and provides you with more flexibility to invest in various options.
The most crucial step to maximizing your 401(k) is to set up automatic payroll deductions for contributions and consistently make them, no matter the circumstances. It may sound simple, but it requires discipline.
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