Investing into your company’s 401(k) retirement plan can be a daunting task for someone not familiar with the process. How much to invest, what the contribution cap is, what allocations does the company match – all of these are factors to consider when determining how much to take out of your paycheck each week. To figure it out, here’s a simple checklist to assist in your decision.
1. What can you afford?
Though you want to take as much out of your paycheck as possible in order to maximize your retirement investment, doing so when you have other financial commitments may not be the best idea. To comfortably retire you need to ensure your financial house is in order during your younger years. This means paying down outstanding debts first and accumulating money in an emergency fund or savings account before you allocate your first deduction towards a 401(k).
So, the first thing to do is take a look at your budget. If you feel comfortable that it won’t be adversely affected by the reduction of money in your paycheck while you pay off debt, then start by making small contributions to the 401(k) plan. If your employer matches what you put in, contribute the minimum amount required for this option. Slowly increase what you add to the 401(k) as you pay off your debts.
2. Does your employer match contributions?
One of the advantages of a 401(k) is it permits your employer to match the contributions you make toward the plan. What this means depends on the company. Some match employee funds up to the maximum allowed, while other organizations only match the first two or three percent of what you contribute. Before signing up for a 401(k), determine what percentage your employer will match, if they do it at all. If it is offered, you will want to make some calculations on how much you pull out each week. This is due to the next item on the checklist.
3. Is there a maximum amount I can contribute?
In normal situations, your company will set an upper limit on how much money you can contribute to your 401(k) on a regular basis. Some organizations set low thresholds while others may allow up to 15 percent of your paycheck to go towards your retirement fund. However, this doesn’t mean the maximum amount, plus any matching funds from the company, will be allocated throughout the entire year. This is due to limits set by the federal government on how much both you and your employer can add to a 401(k) plan. These limits are annually adjusted and subject to cost-of-living increases. In other words, once you and your employer have reached their respective contribution amounts, no other funds will be removed from your paycheck.
Saving for your retirement should start as early as possible. With planning and sound financial practices, you can maximize contributions to your company’s 401(k) to provide a comfortable cushion for your later years.