Everyone remembers the excitement of their first full time job, the training, the tours, and all of the paperwork that comes with starting the new journey. Part of that journey includes deciding how to allocate your income between taxes, take home pay, and company sponsored programs. In order to maximize our long term savings goals, it is important to take advantage of workplace investment opportunities.
While there may be many options for how to invest or hold back, the responsibility to maximize the potential benefits falls on the shoulders of the employee. Every case is different, so it is crucial to ask tax and investment professionals how specific choices will impact your long term savings goals.
Here are a few tips to maximize your 401k:
Get your match – Many companies offer a match for contributions made to the 401k up to a certain level. This means that regardless of what you put in the company will make an equal contribution with no strings attached. One question that we often ask ourselves when starting a new job is, “what is the right number to invest on a monthly basis?” The simple answer is, at least as much as the employer is providing for a match. This is free money that will accrue just as fast as money that you contribute.
Start Today – For many who are starting in the workforce there is an immediate need to maximize take home pay. Perhaps there is debt that needs to be paid, or savings for a major purchase, and the pre-tax accounts like a 401k seem like something that can be addressed later in life. The math on the program is simple, if you put nothing into it, you will get nothing out of it. Even if it is a very small amount, that amount has decades to grow. Conversely, for each year that you wait, time starts to work against you.
Don’t set it and forget it- As is the case with any savings plan, it is important to do a check up on the performance of your money. The markets will go up and down, so there is no need to overreact to changes, but there is a need to make sure the account is structured to grow in the long run. For instance, the funds may have changed managers and there could be a new fee schedule associated, or the match percentage may have increased due to company performance. Each year, you should assess your current income and projected income to see if there is an opportunity to invest a little bit more than the year before. Because of compounding interest, each little bit will grow over time and will rapidly improve the long term savings plan.
Take it with you – Most people will change jobs more than five times throughout their career, and each time there will be an opportunity to move the 401k or to cash out. Even if the balance is low there are options to keep the money in long term savings (such as an IRA). If the cash is taken it will ultimately work against the long term savings plan and result in starting from zero while time has continued.