401(k) Tips for Major Career Milestones

With such an important long-term investment, it’s crucial that you are patient and follow some solid tips throughout your working days, such as the following:

• You should be contributing as much as you possibly can to your 401(k). This is obviously different for many folks, but note that even 2 percent of your income is better than nothing, and 15 percent is going to put you in pretty good shape.
• You employer may match what you save, but only up to a certain percentage, such as 4 percent. Try to meet or exceed that level.
• Diversify your investment. Reviewing the performance of your 401(k) annually is essential to seeing if you need to make any adjustments as well.
• Don’t pull that money out before you are 59-and-a-half years old. Early withdrawal fees are 10 percent, and cause even further losses by limiting your account’s earning potential. To enjoy the magic of compound interest, you have to keep your hands out of your 401(k).

Your goal should be to put 10 percent of your income into a 401(k) as soon as possible, but this may be hard with credit card payments, student loans, rent and social expenses. Enroll in your company’s 401(k) as soon as they allow (sometimes there’s a waiting period) and put away the highest percentage your budget allows. Automate the savings by having it deducted from your paycheck and utilize any available company resources to help you understand more. A Roth 401(k) is an increasingly popular option for young investors, too, as you invest money after it has been taxed (which means it won’t be taxed at withdrawal).

While splurging is tempting, consider increasing the amount you save. For example, if you were saving 10 percent of your $50,000 income and then receive a big promotion and are now making $60,000, consider saving 15 percent of your new salary. You will save $4,000 more per year for retirement and will still have more cash on hand for living expenses.

Try to continue saving a small amount from unemployment salary, odd jobs and other income sources if at all possible. Many times, though, a loss of job can lead to a need to make a withdrawal. There are a few ways to avoid penalties. One way is to save with a Roth IRA instead of a traditional 401(k). As mentioned earlier, Roth IRA funds have already been taxed, so you can take out what you put into the account with no penalty (note you can’t withdraw the earnings early without penalty). Another way is to take out a 401(k) loan, but do note this comes with an origination fee, interest rates and repayment terms. A hardship withdrawal is also an option; for this, you have to demonstrate serious and immediate financial need, and prove that the money from your 401(k) is necessary to cover that need, which can include medical, education, housing and other expenses.

When changing jobs, first think about if you want to keep the 401(k) with your old employer, which may be advisable if you have stocks with them and value is rising. Also, that money can be rolled to your new employer’s plan, withdrawn, or transferred into an IRA. Be sure to compare costs and consider your personal situation before deciding. If putting the money with your new employer’s plan, make the deposit within 60 days, as going over that time frame will be considered a cash-out.

As you approach retirement, you can save at a more aggressive rate. You are allowed to contribute up to $17,500 each year, and an additional $5,500 if you are 50 years old or more. So take advantage of that. Also, since you are going to be using those funds soon, don’t be too risky with the investment options. For example, a young professional may want more risk and make his portfolio 80 percent stocks, while someone approaching retirement may prefer more conservative investments and make her portfolio 70 percent bonds.