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Now is the perfect time to take a closer look at your retirement plan—perhaps the most important benefit you get from your employer.
Retirement planning can be complex, but it’s crucial for securing your financial future. Your 401(k) (or other employer-sponsored retirement plan) is a powerful tool because it can be the best and easiest way to save for a secure, comfortable retirement. It’s designed to help you save a portion of your income before taxes (or after taxes, for Roth after-tax contributions), giving your money the opportunity to grow over time. Many employers also offer matching contributions—“free money” that can significantly boost your savings.
To help you make the most of this important retirement plan benefit. So here’s a “Top 10” checklist to help you get started or make the most of your current plan:
5. Increase your savings gradually
If your plan offers automatic contribution increases, take advantage of this savings-boosting feature! Even if you automatically increase your savings rate just a little—say, 1 or 2 percentage points annually—thanks to the power of compounding it can have a positive impact on your retirement savings.
Just tell us your increase amount once, and then you're good to go every year until you reach the maximum contribution rate of your choice. If you need to change your auto-increase percentage—or stop it completely—you can do it anytime. You’re never locked in.
With automatic annual increases, your savings will have the potential to experience more growth. Even if you contribute more later, you may never catch up to the returns you would have realized if you'd enrolled in auto-increase earlier.
6. Pre-tax or Roth (or both)
Some plans offer the option to make Roth contributions. If so, you’ll want to decide whether you want a tax break now or later. When you make pre-tax contributions, the money comes out of your paycheck before it's taxed. That means you pay less in taxes today and your taxable income is lower. But when you take the money out of your account (most likely in retirement), you'll owe income taxes on your contributions and any earnings.
With Roth, you pay taxes on your contributions today, but potentially never again.2 That's because you can make tax-free withdrawals of your contributions—plus any earnings—as long as you meet two conditions: you're at least age 59½ when you make the withdrawal, and you made your first Roth contribution at least 5 years ago.
Depending on your plan rules, you may be able to make pre-tax or Roth contributions—or a combination of both. You just have to stay at or under the annual IRS contribution limit.
7. Consolidate old accounts
If you’ve had a few jobs over the years (or more than a few), you probably have several different retirement accounts, too. If so, it may be in your best interest to combine your accounts into one. Combining your accounts can give you more control over your money—and potentially save you money, too!
Having your investments in one place can let you see your overall mix. This makes it easier to see the big picture as you work toward saving for retirement and other financial goals along the way. It can also help simplify your financial life—reducing the number of statements you receive, login IDs and passwords to remember, and phone numbers to keep track of.
8. Save to the limit
Maximize your savings by contributing up to the IRS limits each year. If you’re not able to do that, shoot for 12%-15% of your pay, including any employer contributions.
Some retirement plans also offer another way to save: traditional after-tax contributions. If your plan offers after-tax contributions, consider taking advantage of those as well to further grow your retirement fund. They can help you save beyond the annual IRS limit for pre-tax or Roth contributions.
9. Save beyond the plan
Want more tips for saving beyond what’s available through your retirement plan? No problem! Other tax-advantaged accounts—like Health Savings Accounts (HSAs) and IRAs—let you diversify your savings and put more money toward your retirement goals.
If you have access to an HSA, saving in one can help you do more than pay for qualified medical expenses—it’s also a great place to put money aside for retirement. HSAs offer a triple tax advantage: contributions are tax deductible, investment growth is tax-deferred, and withdrawals are tax-free for medical expenses.
You can contribute to an HSA if you're enrolled in your employer's high-deductible health plan. And if your employer doesn't offer an HSA, you can open one on your own.
IRAs also let you save more for retirement outside your retirement plan. Anyone with earned income can open and contribute to a traditional IRA. Both Roth IRAs and traditional IRAs may offer additional flexibility, as well as investment choices that may not be available in your retirement plan.
10. Get help
If you want to handle your own saving and investing journey—but would like some support and guidance along the way—take advantage of the free tools and education provided by your plan.
If you prefer professional guidance, many plans offer advice options to help you invest and manage your money. From online-only to working with an advisor, these advice resources can get you—and keep you—on track toward a comfortable retirement.
The legal details
Whenever you invest, there’s a chance you could lose the money.
1Target-date investments are subject to the risks of their underlying funds. The year in the investment's name refers to the approximate year (the target date) when an investor would retire and leave the workforce. The investment will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. A target-date investment is not guaranteed at any time, including on or after the target date.
2Taxes: Taking money from your retirement account can affect how much you’ll have to pay in taxes. You’ll owe taxes on pre-tax money. You won’t owe taxes on Roth earnings as long as you are age 59½ or older and it’s been at least five years since your first Roth contribution. If required by law, Vanguard will withhold some taxes for you. You may need to pay a 10% federal penalty tax if you take money out early..
The services provided to clients will vary based upon the service selected, including management, fees, eligibility, and access to an advisor. Find VAI's Form CRS and each program's advisory brochure at vanguard.com/adviceforms for important details about these services. Vanguard Digital Advisor’s and Personal Advisor's financial planning tools provide projections and goal forecasts, which are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
