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Monday, January 3, 2022

Made This 401(k) Mistake in 2021? Avoid it in 2022 - The Motley Fool

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Saving money in a 401(k) is a great way to build a retirement nest egg. And to be clear, you'll probably become quite reliant on your personal savings once your time in the workforce comes to an end.

Social Security only provides enough income during retirement to replace about 40% of the average worker's wages. Most seniors, meanwhile, need more like 70% to 80% of their former paycheck to maintain a decent standard of living, all the while keeping up with expenses like housing and healthcare. And so personal savings are often what it takes to bridge that gap.

Now clearly, a 401(k) isn't your only choice when it comes to choosing a retirement savings plan. Anyone with earned income can sock money away for retirement in an IRA.

A person at a laptop looking at a document.

Image source: Getty Images.

But 401(k) plans offer a few distinct benefits over IRAs. For one thing, they come with much higher annual contribution limits. And also, they offer the opportunity to snag free matching dollars.

Many employers that offer 401(k)s also match worker contributions to some degree. To claim that match, however, you'll need to put a certain amount of money into your savings from your own paycheck. And if you missed out on your 401(k) match in 2021, it's imperative that you do your best to avoid that fate this year.

Don't pass up free money

It's not every day that somebody offers you a large sum of money. And so if your 401(k) comes with a matching incentive, find out what it looks like and make every effort to allocate enough funds from your paycheck to claim that match in full.

If you don't snag your 401(k) match, you won't just be giving up free money. You'll also lose out on the opportunity to invest those matching dollars and grow them into a larger sum.

Imagine your employer will match your 401(k) contributions dollar for dollar up to the amount of $3,000. If you don't put $3,000 into your 401(k), you'll lose that opportunity. But you won't just be out $3,000 at the end of the day.

If you were to take your $3,000 match and invest it at an average annual 8% return (which is a bit below the stock market's average), after 35 years, you'd be sitting on a little over $44,000. That's a pretty large chunk of retirement income to give up.

Rethink your expenses

Some people genuinely can't manage 401(k) plan contributions due to their limited income or financial circumstances. But if there's room to cut back in your budget to free up cash for your 401(k), then it pays to make that effort. That could mean dining out less frequently, taking more modest vacations, or even downsizing to a smaller living space.

Remember, even if your 401(k) plan doesn't come with a matching incentive, you'll still need savings of your own to pay your bills once you retire. And if you're able to use your employer's generosity to help you build up that nest egg, then that's an opportunity you really don't want to pass up.

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"avoid it" - Google News
January 03, 2022 at 06:36PM
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Made This 401(k) Mistake in 2021? Avoid it in 2022 - The Motley Fool
"avoid it" - Google News
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https://ift.tt/2SzWv5y

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