Setting aside money for retirement might not seem pressing during the early stages of your career, but wise financial decisions can pay dividends later in life.
Saving for retirement is one of the easiest things to procrastinate about.
People who choose to put it off have their reasons for doing so, of course. Most figure they’ll have more money to save later in life, but you can’t predict much about your retirement — particularly when it’s 40-plus years down the road.
One thing you can forecast? It’s your duty to ensure that you’re financially prepared for a day when you choose to stop working a full-time job. As a result, it behooves you to contribute to a 401(k) or similar qualified retirement plan sooner rather than later.
Why is a 401(k) important?
Setting up a 401(k) is a great way to start saving for retirement. Many employers offer a company 401(k), and some even match employee contributions to encourage team members to put a certain percentage of their income toward retirement. If you work for a nonprofit or for the public sector, your employer may offer a 403(b) or 457 retirement plan, which works similarly to a 401(k) plan.
Before contributing to your 401(k), though, conduct a little research to learn how to get the most out of your benefits package. If you work for a startup or small business that doesn’t offer a 401(k), there are other types of qualified retirement accounts that you could be eligible to use. Some of these apply even if you’re self-employed, including options like a SEP IRA or a SIMPLE IRA.
Follow the three steps below to ensure that your qualified retirement plan is primed to help you accumulate wealth throughout your life:
1. Conduct a tax analysis. With a little planning, retirement savings can help you minimize your tax burden while ensuring you reach your financial goals as efficiently as possible. For some, that means deciding whether to make pre-tax contributions to a traditional 401(k) that will be taxed upon withdrawal or to invest your after-tax income in a Roth 401(k) that you can use without any tax concerns once you reach retirement age (not all employers offer the Roth option). Explore the tax responsibilities that accompany every choice to help narrow your options toward the right one.
2. Maximize contributions. Contributing to a 401(k), an IRA, or even a SEP IRA, if applicable, will reduce your taxable income and your annual tax liability. Moreover, retirement accounts that shield you from taxes will enable your retirement savings to grow even more. If you aren’t in a financial position yet to maximize your 401(k) contribution, you should at least contribute whatever’s necessary to receive any match your employer offers.
3. Talk to a professional. A professional wealth manager can help you allocate your 401(k) assets in a way that can optimize the growth of your retirement savings and reduce risk. Everyone knows that diversification is essential, but a professional will ensure that your investments are diversified in the right way. Take your search for a financial advisor seriously, asking questions and seeking referrals from people you trust.
Learning why a 401(k) is important represents an integral first step toward a successful retirement plan. With employer matches, higher contribution limits than an IRA, and the flexibility to contribute money before or after taxes, you don’t want to wait to capitalize on these benefits — pursue them now to set yourself up for a fruitful and comfortable retirement.
Are you seeking knowledgeable and experienced insights on the best way to contribute to a 401(k)? Contact us to learn more or to inquire about a consultation.
This article is prepared by Pekin Hardy Strauss, Inc. (“Pekin Hardy,” dba Pekin Hardy Strauss Wealth Management) for informational purposes only and is not intended as an offer or solicitation for business. The information and data in this article do not constitute legal, tax, accounting, investment, or other professional advice. The views expressed are those of the author(s) as of the date of publication of this report, and they are subject to change at any time due to changes in market or economic conditions. Pekin Hardy cannot assure that the strategies discussed herein will outperform any other investment strategy in the future; there are no assurances that any predicted results will actually occur.
