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Planning for Retirement With Your 401(k)

No matter your age or how close you are to retiring, it’s a good idea to reflect on your long-term financial plans from time to time. If you live the Financially Independent Retire Early (FIRE) lifestyle, you know there’s a lot of planning that goes into aggressively paying off debt, cutting spending and actively saving. But even if that’s not your focus, you can check on your savings plan by asking these questions.

How much do I need to save for retirement?

Experts recommend saving 10-15% of your yearly income for retirement. Retirement professionals also estimate you’ll need 70-90% of your current income to live comfortably during retirement. Say you make $50,000 a year, will need 80% of that income and will be in retirement for 30 years. In this scenario, you will need to have saved $1.2 million by the time you retire.

You should also consider where you plan to live. As some government websites map out, the cost of living in the Northeast is higher than in the South or Midwest. From expensive purchases like buying a house to weekly activities like grocery shopping, expenses will add up fast. If you’re planning on retiring somewhere with higher living costs than you’re used to, you should add a savings cushion into your retirement fund.

How can I maximize retirement savings?

The first step to maximizing your account is taking full advantage of your employer-sponsored matching program. Many companies offer to match a certain percentage of the pretax income you put in your 401(k) or 403(b) account. If your employer makes an equal contribution of up to 6% of your income, make sure you’re contributing at least 6%. Only investing 3% would be leaving free money on the table. Review your benefits package to ensure you’re making the most of any matching program your employer may offer.

If you have more monies to contribute, add to your 401(k) or to an Individual Retirement Account (IRA). An IRA only takes individual contributions and provides the flexibility to invest in funds you may not have access to with your 401(k). If you have a Roth IRA, you’ll put your after-tax income into the account and will not pay taxes on withdrawals during retirement. On the other hand, contributions to a Traditional IRA are tax-deferred, so you’ll have to pay taxes on withdrawals in retirement.

What are the different types of 401(k) investments?

Employer-sponsored 401(k) and 403(b) plans have a curated list of funds you can invest in. A combination of securities — stocks, bonds and short-term debt — make up each fund. Different types of funds carry different levels of risk.

  • Conservative Funds focus on risk-averse investments, where your money will grow slowly. These usually consist of high-quality bonds with proven returns, like U.S. Treasurys.
  • Value Funds carry a medium risk level and are expected to have moderate growth.
  • Balanced Funds invest your money in “safe” stocks and bonds, and in riskier stocks.
  • Aggressive Growth Funds search for the next stocks that will hit the big time. That means you may either get a lot of money in return or see a lot of money get depleted.
  • Specialized Funds invest in different categories of stock, like pharmaceuticals or energy. You can also use them to invest in foreign markets.
  • Exchange Traded Funds track a specific sector, commodity, like corn or rice, or stock index. They are traded like regular stocks.
  • Target-Date Funds, also known as Life-Cycle Funds, adjust your investments according to your projected retirement date. Rather than hand-pick the funds you want to invest in, the fund manager will make those selections for you.

How much risk should I be taking with my retirement account?

General guidelines recommend considering your age when determining how much risk to take. The younger you are, the more time you have to recover from losses. You can afford to invest more in stocks and riskier investments, like aggressive growth funds, in hopes that you’ll get high returns. The opposite applies to people who are closer to retirement. With less time to recoup potential losses, it’s a safer bet to invest more in funds that focus on bonds, like conservative funds.

Regardless, it’s smart to have a diverse portfolio at any age. Mixing securities and spreading your investments across different industries may help minimize the effects of market swings and yield higher returns in the long run.

How often should I check my 401(k)?

The U.S. Department of Labor views retirement as the most expensive thing you will ever buy. It recommends checking your 401(k) and other financial planning tools at least once a year.

Answers to these questions may vary based on your goals, financial situation and stage of life. Whether you have young children, are budgeting for an empty nest or are about to retire, the earlier you start saving, the more money you’re expected to have during retirement. For more tips on how to own your financial future, view our free courses at KEYS® Online. Remember, it is always a good idea to consult with your financial planner for more information and advisement on your portfolio.

Nicole Mayer
By Nicole Mayer, GM Financial

Nicole Mayer is a whisk-taker with a fondness for desserts. From baking to organizing, she’s motivated by trying new things and sharing her knowledge. When she’s not in the kitchen rocking out to ‘80s music, you’ll find her serving up aces on the tennis court.


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