Tip 1. Start Contributing NOW!
Let’s compare Slow Sue to Fast Fred. Slow Sue saves $5,000 per year for 30 years for a total of $150,000, earning 8% per year. Fast Fred delays contributions for 15 years, but contributes $10,000 for 15 years for a total of $150,000 and also earns 8%. When they retire on the same day, Slow Sue has $625,000 while Fast Fred has $290,000.
The earlier you get started, the better off you generally are.
Tip 2. Maximize Your Contributions
In 2013, employee contribution limits are $17,500 per year if you are under age 50 or $23,000 if you are age 50 or older. Maximize your contributions within your budget. The annual contribution limits are a one shot deal. You can never tell your employer - my finances were tight last year so I skipped my $17,500 contribution – just double it to $35,000 this year. Each year is a use-or-lose-it opportunity.
Tip 3. Get Employer Match
Many employers offer a match to your contributions. For example, many employers will match 3% of your savings by contributing dollar for dollar. This is like a 100% return on your investment, make sure to save at least 3% of your salary to get the employer match!
Clearly understand if you vest your employer’s contributions immediately or if you vest them over time (e.g.: 20% vesting per year over five years). Clearly understand when your match will occur. If your match vests immediately and is made each time you make a contribution, you have less at stake if you transition to a new employer in the middle of the year. If your match vests at the end of the year and your employer matches at the end of the year, you have more at stake with a middle of the year transition to a new employer.
Tip 4. Maximize Your Risk-Adjusted Return
Many of us have heard the rumblings around the water cooler: ‘You can’t loose money in gold, so put all your 401(k) money in the gold fund’ or ‘Real estate never goes down, so put all your 401(k) money in the real estate fund.’ So, which is it? Probably neither. Maximizing your risk-adjusted return entails building a portfolio of investments based on your risk level, expected return, goals and objectives. You can achieve this easily with several super low cost index ETFs.