How To: Maximize Your Earnings
In this article: Maximizing your retirement earnings is all about increasing your earning potential, not just in terms of your salary, but also in experiences and education.
Reading Time: 4 minutes.
Retirement planning advice tends to be based on the principle of spend less, save more. However, in the early stages of preparing for retirement, it is hard to think about saving for it. Your income might not be enough and retirement itself might feel light-years away. Still, you might be thinking, how can I maximize my retirement earnings? Maximizing your earning potential is the first phase in planning for retirement. Its all about increasing your income so you can maximize your retirement earnings for the future.
Revisit Your Plan And Consider Adjustments At Least Once A Year
One of the best things about using a 401 to invest for retirement is that you can put your investments on autopilot. However, this doesn’t mean you should simply set up your 401 contributions once and forget it forever. You need to make sure you’re on track with your retirement goals, that your portfolio remains balanced, and that your investments are performing as expected.
To stay on top of your retirement investing, make a repeating appointment on your calendar to check in on your 401 at least once a year.
You should also consider making changes as you reach key milestones in your life and career. If you get a big raise, consider upping the percentage of your salary that goes toward your 401. If you pay off your student loans, consider shifting the money you’d been spending there to instead build wealth on your behalf. When you hit key milestone birthdays or your kids become able to care for themselves, those are also great times to revisit your plan and make adjustments.
Don’t Play It Too Safe
Investing your 401 too conservatively is a good way to stunt its growth. The 7% average annual return used in our examples above is based on a stock-focused investment mix, and if you’re at least 10 years away from retirement, that’s really the way to go. As you get closer to the tail end of your career, you can shift your 401 investments into safer alternatives, like bonds, but stocks are especially important when you’re younger.
Keep in mind that when you first sign up for your 401, your plan might have your contributions filter into its default investment option — which will most likely be a target-date fund. Target-date funds take a lot of the guesswork out of long-term investing, but they can also be somewhat conservative, so rather than settle for one, explore the choices offered by your plan.
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Big Questions To Answer To Decide Whether To Save More
To figure out if you should be contributing more to your retirement savings, there are three big questions youll need to answer
Question #3 is what well address here. If youve already maxed out your employer match and you want to save more money for retirement, should you prioritize your 401 or other retirement accounts?
Well dive into that in the next section.
Tips To Maximize Your 401 For Retirement
Pensions are pretty much a thing of the past. With the switch to company-based 401 plans, the burden of saving for retirement falls to you.
“The Leave It to Beaver idea of a worker spending 40 years with a company and retiring with a pension and a watch went out with black-and-white television,” says Sen. Ron Wyden D-Ore., chairman of the Senate Finance Committee, who held hearings on the retirement crisis last month.
So it’s vital for you to be engaged in your company-sponsored 401 plan. Financial planners have some common tips to help you get more out of those plans. For instance:
Contribute at least enough to your 401 to meet the employer match. Otherwise, you’re giving up free money.
Early withdrawals can result is significant taxes and penalties.
If you’re 50 or older, take advantage of the “catch-up” provision, which lets you put an additional $5,500 into your plan each year .
1.The 1% rule. “One of the things we encourage people to do is increase by 1% each year,” says Larry Rosenthal, of Rosenthal Wealth Management in Manassas, Va. “Each year, up it by 1% till they reach the maximum. You can work that into a savings each year. It slowly puts more money each year without hurting the budget.”
4. Don’t forget about that old 401 you left at your last job. Lena Haas, senior vice president for retirement, investing and saving at E-Trade, says never leave your money at the old job and forget about it.
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Start Taking Less Risk
You can also invest in the stock market with your own brokerage account, but as you near retirement, most financial planners recommend taking less risk in your investments. Quicken lets you see what youre holding in your mutual funds and set target allocations across your entire portfolio, helping you make informed decisions.**
Take Advantage Of Employer Contributions
If youre fortunate enough to have employment benefits that include a 401 retirement plan, theres a good chance your employer has a contribution matching plan in place. For every contribution you make toward your retirement, your employer will match some percentage of that amount up to a certain cap, essentially paying you more for doing the same job youre already doing.
Talk to your employers HR department to make sure you’re contributing enough to get 100% of your employee match. Most young professionals have a hard time contributing enough to their retirement to meet their employers cap, but try to hit that cap as soon as you can.
If youre using Quicken, you can track those contributions to make sure youre taking maximum advantage of your employers plan. And remember that your 401 is still a brokerage account. Like any other investment account, youll want to make sure its invested in a diversified portfolio. Quicken lets you connect your investment accounts along with all your other financial accounts, so you can see your complete portfolio.
How A 401 Employer Match Works
While every matching program is different, a typical plan offers a partial match or a dollar-for-dollar match. The names clue you into how they work. A partial match means your employer agrees to match a certain percentage of your contributions, up to a specified point. For example, your company could match 50% of your contributions up to 6% of your salary. That means if you contribute 4% of your salary, your employer will contribute 2%.
A dollar-for-dollar match means that your employer has agreed to match 100% of your contributions, up to a specified point. So if you contribute 5% of your income to your 401, your employer also contributes 5%. Just like the partial match, anything above the match limit is not matched.
How does this work in the real world? Well, lets say that you make $3,000 per paycheck and that you contribute 10% of your salary to your 401. That means that $300 of your own money is deposited into your 401 as an employee contribution each paycheck, and your employer matching contribution breaks down as follows:
Take Advantage Of The Gift Of Time
One of the most important elements of retirement planning is time. Even if you invest a small amount, getting started early is the key to success, said managing director Canon Hickman of wealth management company Equity Concepts.
Lets say you invest $100 a month starting at age 25, and retire at age 60, he said. Your account earning 7% would have grown to $165,884. But if you decided to wait until age 35, it would only have grown to $75,898. Even worse, if you waited until age 40 to start investing, you would have to save more than three times as much each month just to catch up by age 60. So get started early, and itll position you for success later on down the road.
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Increase Your Deferral Rate
Taking advantage of a company match helps you capture valuable contributions from your employer, but it may not be enough. Many 401 providers recommend saving at least 10% annually over the course of your career.3 But, the average 401 contribution is closer to 6%.4
If you arent able to save 10% to 15% of your pay at the beginning of your career, aim to gradually increase your deferral rate over time. One smart tactic is to boost your 401 deferral rate every time you get a raise or bonus. This enables you to save more without reducing your take-home pay.
Another way to consider for enhancing your savings rate is to increase your deferral rate by 1 percentage point every year. Some companies offer an automatic escalation feature that will periodically increase your savings rate with a simple click of a box other companies require you to manually make this change.
A good time to review your contribution amount is at the beginning of the year when youre looking carefully at other benefits elections, such as medical and dental insurance, since the amount you put towards these benefits will have an impact on your paycheck. Another good time to revisit your contribution amount is when you receive additional compensation, whether through a raise, promotion or bonus.
Avoid 401 Loans Or Early Withdrawals
Your 401 may seem like a tempting pot of money if you run into financial trouble. That’s especially true because many 401 plans allow you to borrow against your account and pay interest to yourself.
These 401 loans can help you avoid early withdrawal penalties that otherwise apply when taking money out of tax-advantaged retirement accounts before age 59 1/2.
But if you take money out of your 401, even temporarily, you’ll lose the chance to earn returns on it. Aim to avoid this in 2022 if at all possible as you want your money working for you.
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Investing Tips To Maximize Your 401
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The best kind of 401 plan is one that is used. The employer-sponsored retirement plan is typically easy to open and fund , and offers tax benefits vs. saving and investing in a brokerage account.
Understanding the nuances of this all-important savings vehicle may help catapult investors into full-blown expert territory, helping them maximize their 401 investing.
While everyones financial and retirement situation is different, there are some useful 401 investing tips that could be helpful to anyone using this popular investment plan to boost their retirement savings. These 401 should apply no matter what stage of retirement saving youre inas long as youre participating in a 401.
1. Take Advantage of Your Employer Match2. Consider Your Circumstances Before Contributing the Match3. Understand Your 401 Investment Options4. Stay the Course5. Change Your Investments Over Time6. Findand KeepYour Balance7. Diversify8. Beware Early Withdrawals
First Know Your Contribution Limits
Try to contribute as much as the law allows so you get the most benefit if you contribute too much, you may have to pay double the taxes.
If you have an Individual Retirement Arrangement , you can generally contribute up to $5,500 for 2017. If you are married and filing jointly, each of you can contribute to the plan limits.
Any taxpayer age 50 or older at the end of the year can contribute up to $6,500 per year to a deductible or nondeductible IRA.
For Roth IRAs, the amount you can contribute starts to phase out when your modified adjusted gross income reaches $118,000 .
If you contribute more than the limit to your IRA account, all excess contributions are taxed at 6 percent per year as long as the extra amounts remain in the account.
To avoid the tax, consider withdrawing the amount over the limit or taking out any income earned on the excess contribution.
The maximum contributions to 401, 403 and 457 plans are $18,000.
Keep in mind, if youre in a Deferred Compensation Plan, called a 457, youre subject to a separate limit of $18,000 that includes both your contributions as well as those made by your employer.
No matter what plan you have, TaxAct calculates your maximum contribution for you through its step-by-step interview.
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Earn More To Save More
Traditional advice of spending less to save more is not useful in this first phase of preparation for retirement. You might not have any earnings leftover to save or you might have debt. Early on, saving at least 15% of your income for retirement might just not be possible. At least not yet. As Michael Kitces puts it there really isnt much of any spending to cut in order to spend less.
So for this first phase, it is about earning more to save or save more. Earning not just in terms of your salary, but also in experiences and education. Research shows that people with a masters degree or doctorate can earn a much higher starting salary than those with only a bachelors degree. College grads are also more likely to be employed than mid-career high school grads, according to the Georgetown University Center on Education and the Workforce.
Be aware of how much you are investing in these increased earnings. If you take out a loan to pay for school, you will have a debt to pay. In the US, two-thirds of college students took on debt in 2018. What you have to think about and evaluate is if your degree will pay for itself. Having a well-thought-out spending plan will ensure you pay off your debt while maximizing your retirement income. You will be able to save at a higher rate in the future by increasing your lifetime earning potential.
How To Maximize Your 401 Employer Match
Now that you have an understanding of the types of contributions available to you, its time to start maximizing them. The first step is making sure youre taking full advantage of your employer match.
Simply put, your 401 employer match is almost always the best investment return available to you. Because with every dollar you contribute up to the full match, you typically get an immediate 25%-100% return.
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Getting The Most From Your Employer 401 Match
Getting the most from your 401 plan is one of the best things you can do when planning your retirement. That’s because your employer may match the money you put into your account. If you work at a place that offers a 401 match benefit, when you put money from your paycheck into your 401, your employer puts money into the account, too.
If your company offers a match, you may have gotten a notice about it when you started your job. You can ask the 401 plan manager at work whether a 401 match is offered if you haven’t already heard about it. Companies want employees to contribute to their 401, so they match the funds as a way to spur on workers to save for their futures.
Think of matching funds as free money you receive from your job after you make pre-tax contributions to your 401 plan from your paycheck. If you fail to put money into your 401, you give up the chance to receive your employer’s matching amount.
Contribute At Least As Much As Your Employer Will Match To Your 401 Retirement Plan
How does free money sound to you? Of course, it sounds pretty good. Thats exactly what you get when you get an employer match. Lets say your employer will match 5% of your salary in contributions. If you make $75,000, contribute at least $3,750 and your employer will too, giving you $7,500 right off the bat.
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Ask About Employer Match
In 2017, 42% of employers offered a 401 match. This is free money. I don’t know how to emphasize how awesome this is. The most common form of employer match is 100% of the first 6%. In plain English, this means that your employer will match every dollar you contribute up to 6% of your salary. So, in that scenario, if you make $50,000 a year and contribute $3,000 to your 401 your employer would contribute another $3,000 on your behalf.