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When it comes to a retirement fund, it is no longer a question of whether you need it but rather, when you will be needing it. As you age, you need to realize that there will come a time that you can no longer work to support your family or even your own lifestyle. When that time comes, your retirement fund will take the front seat as being your main source of finances. That being said, you need to ask yourself, is your retirement fund target enough to supply your financial needs?
Sadly, Statisticbrain.com shares that about 80% of consumers with ages ranging from 30 years old to 54 years of age are not optimistic that they have enough. They think that the nest egg they are building will not be able to sustain them during retirement. This complicates the situation especially for the older consumers because trying to fast track your contributions becomes more challenging as you near retirement.
The ideal solution to this problem is to start as early as you can. This lowers the chance of you stressing out just when your time to save for retirement is almost up. It is hard to have to catch your contributions when you are already reaching retirement age. You might find yourself having to push your retirement date further because you still have to increase your fund. Or worse, you might be forced to continue working until you drop – a scenario that nobody really wants to have.
Obviously, you do not want to outlive your retirement money and thankfully, there are steps to avoid this. The things is, you need to compute the minimum amount that is necessary to sustain your retirement adventures. In order to do this, you have to understand as much as you can about your retirement fund or more commonly referred to as 401(k) fund.
By understanding the retirement accounts that you need to contribute to, you should be able to plan your retirement targets easily. After all, it will always benefit you to know an endeavor before you take the plunge. Just like before you get married, you want to find out as much as you can about your partner and marriage before diving head first.
Important 401(k) facts you need to know
One of the main goals that will push you to save up for the future is being financially ready for early retirement. But before you funnel all your funds into your retirement fund, here are a few things you need to know.
- Maxing out your contributions. Forbes.com shares that the maximum contribution amount for 2015 is at $18,000 which is up from $17,500 in the past years. It might be hard to look at it from a lump sum point of view so it would be better to break it down into installments. If you break down $18,000 into 12 months, that is $1,500 – which basically means $50 per day. The $50 per day is easier to digest compared with $18,000. If you think you are falling short of your retirement fund target, better max out your contributions by reaching this $18,000 a year amount.
- Take advantage of employer matching. There are some employers who offer to match your contributions while you are employed in their company. You need to take advantage of this because this is essentially free money that the company is giving you. Just be sure to understand the mechanics behind the program. There might be a maximum amount that the employer will match. You may want to reach that amount to maximize the free money you will get.
- Salary increase can go to extra contributions. If you get an increase in salary after your performance at work, it might be a good idea to put that extra amount into your retirement fund. If you have been able to live off your current income, you just need to continue with that budget and automatically transfer your increase to your retirement fund. Probably the only thing you can use that extra money for, apart from your retirement savings, is to pay off high interest debts. But once you finish off these debts, make sure to allot the freed money from your budget and put it towards your retirement account.
- Know that you can change your 401(k) contribution. This is usually set when you start working but it is possible that you adjust this amount mid-year. Surprisingly, a lot of people do not know about this. It is usually best that when you change your contribution, you increase the amount until you reach the maximum allowed contribution amount. You will reap the benefits of this financial move in the long run.
- Upfront tax deduction. When talking about retirement savings, you need to know that the 401(k) is not the only tool you can consider. One alternative is going ROTH which puts in already taxed funds into your nest egg. This means that when retirement time comes along, taking money out is already tax-free. With 401(k), your withdrawal will always be taxed.That means, the money in your 401(k) will not be the whole amount that you will get when you retire.
- Your 401(k) is not a line of credit. Technically speaking, it can be because you have the option of taking money out of it before retirement. After all, it is your money. But it is better to stay away from this because you have to pay for a penalty if you do this. Not only that, you will be taxed twice for it. When you pay back the loan from your 401(k), you are paying it with a portion of your income that is already taxed. Then, when you withdraw it when you retire, the money will also be taxed. It is best to just let your fund accumulate over the years and only withdraw when you are ready to retire.
- Set the boundaries for hardship. There are instances when you have no choice but to take out from your fund in case of hardship but you need to set limitations on what hardship is for you. A few month’s of being behind on your payments does not automatically translate to hardship. Be sure to set these limitations and as much as possible, look for other sources of funds first before dipping into your nest egg. If possible, make it a life and death situation before you use a part of your retirement savings.
- Get your partner in on it. If you are married, it is a must that the both of you save for retirement. This is because if one of you would have to shoulder the shortcomings of the other especially with a limited retirement fund, you might both have a hard time making ends meet.
- Consolidate all your 401(k). If you have been transferring from one employer to another, chances are you might have several 401(k) accounts under your name. If this is you, get all your accounts and consolidate them under one fund. This makes is easier to monitor and build up.
- Monitor your funds. Be proactive in monitoring and making adjustments whenever needed when it comes to your retirement fund. The trick is to not go on autopilot and take active control of your finances including your 401(k) account.
- Getting the funds too early. If you see that you already have a big amount for retirement, fight off the temptation to cash in on it earlier than needed. You might want to hold off and let it sit there for a while to give you a chance to think things through and plan out your next course of action.
Making sure you are set after the corporate life
You cannot work forever and this is a reality that you will have to come to terms with as you get older. You might take up some consultancy jobs or some part time projects but your physical body might not be able to handle the stress of a full time job. As much as the mind is willing, your body might not be up for the task.
This is why your retirement fund is important and you need to build it up as soon as possible. The earlier you accomplish this, the more the compound interest might work in your favor. This will help you retire at an age that you want and not have to push back your retirement date because you still do not have enough in your fund to sustain you.
Before you can start on a strategy to set up a good retirement find out the different types of retirement funds first. Here is a video that may be able to enlighten you.
