NEW YORK (MainStreet) —Retirement is likely the last thing on Millennials’ minds as they embark on their first career trajectory, yet saving early through a 401(k) plan yields great returns in the long-run.
These six tips will help build and create a plan to maximize your retirement goal even if you have already started socking away your hard-earned money.
Tip 1: Save Early and Often
Advice from your parents, friends and personal finance websites can be overwhelming and even contradictory at times, but following this mantra is the best way to start. Whether you opt in for auto enrollment or have money automatically deducted from your checking account into a savings account, saving money from every paycheck means you are on the right path.
“Plain and simple, if you want to become financially secure, you need to start at an early age,” said Jamie Hopkins, a retirement professor at the American College of Financial Services in Bryn Mawr, Pa. “This is the most important financial decision you can make.”
Enroll in the 401(k) plan as soon as your company permits it. Some businesses let you sign up on day one while others make you wait three months or longer. Believing that you can catch up later on is a problematic.
“I would recommend enrolling as soon as you are allowed,” said Catherine Golladay, vice president of 401(k) participant services at Charles Schwab, the San Francisco-based financial institution. “Thanks to the power of compounding, the sooner you start saving, the more money you can have in your account in retirement.”
Tip 2: Sign Up For Your Employer Match in a 401(k)
Many employers still match a portion of the amount you invest in your 401(k) plan. While some companies are more generous and match, say, 8% of your salary, others start at 3%. The key is to find out how much you need to put in before the company starts matching, he said.
“Failing to take full advantage of the matching contribution is like leaving free money on the table,” Hopkins said.
One of the incentives used by employers is to match 50 cents for every dollar you contribute for up to 6% of your salary. A recent Voya Financial survey found that 83% of employers match some of the money that employees contribute to their retirement plan.
“Take advantage of auto escalation if it is available in your plan, so your retirement savings will go up a little each year to coincide with your raise,” said James Nichols, head of retirement income and advice strategy for retirement at Voya Financial.
Tip 3: Choose More Aggressive Investments
Don’t allow fear to play a factor in your decision on choosing investments which produce a greater return. Invest in high quality mutual funds or exchange-traded funds over bonds, said Grant Easterbrook, co-founder of Dream Forward Financial, a new low cost 401(k) plan based in New York. Index mutual funds such as the S&P 500 are popular, because they give you a broad exposure to many sectors and diversifies your portfolio easily.
“Don't be afraid to pick ‘aggressive’ investments, because you're not going to need the money for 30 to 40 years,” he said. “You don't have to worry about needing to take your money out when the market is down like a 50 or 60 year old nearing retirement does.”
Avoid just signing up and contributing, because if your 401(k) “just sits in cash, you are missing the point,” said Bijan Golkar, CEO of FPC Investment Advisory in Petaluma, Calif.
“Too many first-time 401(k) savers simply start contributing, but do not select any investments,” he said. “If you want to be safe, choose three different index funds if it’s possible: domestic equities, bonds or international equities. It is that simple.”
When you are younger, you have the opportunities to invest more aggressively than you will have later in life because the odds of the market rebounding are higher. Don’t be afraid to invest heavily in equities, said Hopkins. Be sure to diversify your investments within that asset class and you choose some mutual funds, international equities and stocks from multiple sectors.
Tip 4: Watch Out For the Fees
When you are choosing mutual funds or ETFs, make sure to look at the amount of the fees they charge instead of just the annual or five-year returns. The 401(k) plan might have low-cost options such as index mutual funds, which have lower operating expenses, said Golladay.
“Investing in them can mean putting less of your savings towards management fees and putting more into your account,” she said.
Fees are very important, because over the course of 30 years or more, it means an investor can easily earn at least $155,000 simply by choosing an investment where the fees are lower, according to Demos, a N.Y.-based public policy organization.
“If the plan is expensive, but you still have a good matching program it's worth it,” said Easterbrook. “If it's expensive and there's no match, it's probably not worth it, and you should invest your money in an IRA.”
The fees add up quickly and “can eat up nearly 30% of your retirement savings over 10 years, even a seemingly small annual fee such as 1.27%, which is the average U.S. mutual fund fee,” said Mitch Tuchman, managing director of Rebalance IRA in Palo Alto, Calif.
Tip 5: Invest In an IRA If Your Company Lacks a 401(k)
Even if you don’t have access to 401(k) plan, saving early means you will have more money once you retire. Both Roth IRAs or traditional IRAs are good options as long as you contribute toward it on a regular basis, Nichols said.
“Make it easy on yourself and set up the feature so it automatically comes out of your account every month,” he said. “This way you can budget for your retirement savings just like any other expense.”
Tip 6: Never Borrow From It
While it may be tempting to take a loan or withdrawal, avoid it all costs even though you are young and plan to work for the next four decades, Easterbrook said.
If you leave your job, most companies require you pay it back immediately. Without the funds to repay it, the loan is treated as a distribution which is subject to federal and state income tax, as well as an early withdrawal penalty of 10% if you’re under the age of 59.5, said Shomari Hearn, a certified financial planner at Palisades Hudson Financial Group in the Fort Lauderdale, Fla. office.
“The opportunity cost is huge and early withdrawals and loans are a big part of why people don't have enough for retirement,” Easterbrook said.