When it comes to retirement planning, the power of saving smart and saving early can never be overstated. We all want to retire on time with ample security and peace of mind. That’s why we’re celebrating National 401(k) day!
In the US, the first Friday after Labor Day is reserved to celebrate the 401(k). While it may be one of the most common savings tools for employees, there are other creative and crucial ways to generate supplemental retirement funds.
Let’s break down exactly what a 401(k) is and just how easy it is to find solutions that can help build and strategize your retirement savings.
The Basics of 401(k)s
According to Investopedia, a 401(k) Plan is a retirement savings plan offered by many American employers that has tax advantages for employees who agree to have a percentage of each paycheck paid directly to an investment account.
401(k)s offer two basic types: traditional and Roth which each have unique tax benefits depending on an employee’s preferred method of saving.
Traditional 401(k)s are pre-taxed meaning that taxable income is reduced, but withdrawals on the 401(k) are taxed later. Roth 401(k)s use after-tax income so there’s no tax deduction in the contribution year, but withdrawals are tax-free.
Here’s where the true savings potential comes in. In many organizations, employers can choose to match part or all of the employee’s contribution. Meaning for any given paycheck, an employee’s contribution to their 401(k) could be as much as doubled! Not to mention, 401(k)s compound interest over time, meaning the potential to earn is only increased.
Strategic Savings with Your 401(k) and Beyond
When directing your payroll to a 401(k), it’s always best to contribute at least the percentage matched by the employer. Then, as you progress in your role, try increasing your percentage with each yearly raise or promotion. This will help you be more prepared to maintain the same quality of life in retirement.
Additionally, each employer has a different vesting period. It’s best practice to know how long you need to stay within an organization before being able to experience the full benefits of your 401(k). Sometimes, an extra year or two can make the difference between reaching all, some, or none of your matched 401(k) contributions from your employer.
Through job changes and life events, it’s important to keep your funds in your 401(k) until you’re able to withdraw the money in retirement. Early withdrawals can come with penalties and fees that can cut into your savings. If you know you’ll experience a job change, rather than cashing out your current 401(k) or having your former employer send you a check for the amount, coordinate with your old and new employers to rollover your old 401(k) into your new account. This will help you save on fees and any lost interest.
Unique Ways to Supplement your 401(k) and save for retirement, a major upcoming expense, or a rainy day.
While a 401(k) is an incredible foundation to start building your retirement savings, it is not the only tool available. In addition to the incredible benefits of a 401(k), you can experience increased savings with:
- IRAs (Roth and traditional)
IRAs are another type of retirement account that you can use to supplement your 401(k) plan. IRAs offer a large investment selection and often include more flexibility for contributions and withdrawals. If your employer doesn’t offer a 401(k) match, it’s best to fund an IRA or Roth IRA first. Then, if you max out the IRA, begin contributions to your 401(k).
- Health Savings Account (HSA) and Investments
HSAs offer the ability to set aside pre-tax funds for qualifying medical expenses. This is a powerful tool that can help keep your personal savings and retirement savings where they belong. Plus, HSAs can also be used for long-term investing. For example, the Clarity HSA Investment experience offers a simple way to customize additional savings on top of 401(k) with 3 personalized investment models. Learn more here.
- Flexible Spending Accounts (FSAs)
By utilizing the everyday benefits of an FSA, employees can save on medical costs now so you can keep your hard-earned savings in the bank! Plus, with the FSA Store, you can easily determine which purchases can be covered to strategize your savings better.
- Personal Investment Accounts
From real estate to stocks, bonds and certificates, there are dozens of options to invest your personal savings into aside from your retirement or health-specific accounts. Keep in mind, however, that these accounts typically involve greater risk and an experienced eye in the investment market. It’s always best to contact a personal financial advisor to ensure you make the safest and smartest investments.
- Budgeting Tools and Technology
When it comes to saving, technology is your friend. Take advantage of apps, tools and programs like QuickBooks that can help you be a savvy saver. Additionally, always remember to explore the electronic options available to you from your investment agencies. Many offer automatic contributions or transfers so you can stay ahead.
Building Your Nest Egg
No matter what your retirement journey may look like, it’s never too late to take advantage of some of the standard, and not-so-standard, tools that can help strategize your path toward a stress-free retirement.
Clarity’s dedicated customer service team supports long-term financial fitness by offering tips and resources that help you succeed. Take this National 401(k) Day to check in on your own retirement strategies.