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Unless you are very lucky and you have an employer which offers you a company-backed pension plan, chances are good that you are more or less on your own when it comes to figuring out how to save for your retirement. A lot has changed since your parents’ days.

Nowadays, your company probably offers a 401(k) instead.

What’s the difference between a 401(k) and a pension plan?

  • With a pension plan, the employer assumes the risk of the investment.  You are guaranteed a certain monthly income in your retirement.
  • With a 401(k), you are the one assuming all of the risk on the investment. There are no guarantees whatsoever.

Your employer will make contributions to your plan, so a 401(k) can still pay off handsomely—but only if you make proper use of it. This can be something of a challenge since 401(k) plans are notoriously convoluted. Many employees make costly mistakes managing them.

Here are some tips to help you start maxing out your 401(k):

Contribute following the 1% rule

In the beginning, you will probably struggle to contribute toward your own retirement. This is only natural. You still are at the bottom of the ladder and you do not have a lot of experience saving money yet. As the years progress, however, you will learn how to budget more efficiently, and you may also start getting promotions and pay raises.

At that point, you can start putting more money into your retirement account. The idea behind the 1% rule is simple: each year, you contribute 1% more to your 401(k). This shouldn’t stretch your budget too much, but it will ensure that you max out your account.

Get a full match if you can

Obviously, you may only be able to contribute a finite amount of money into your 401(k) each month, but you should try and contribute at least enough to qualify for the full employer match. Remember, your employer selected that minimum with your salary in mind, so it should be possible if you budget wisely. If you do not put in enough for the full match, you are essentially saying “no” to free money.

Be careful with job-hopping

Nowadays, it is rare to work for the same company for twenty or thirty years. Most people are forced to jump from job to job or company to company numerous times over the course of their careers. Job security simply isn’t what it used to be.

That can have an unforeseen consequence for your 401(k). Your company has a “vesting schedule” for your plan. Basically, up to a certain point, you are not yet “vested” in your plan. After that point, you are.

If you leave your current job before you are vested, you will forfeit all of the money your employer has been contributing to your retirement account. It will all be returned to the company. If you leave your current job after you are vested, you get to keep those employer contributions.

So if you have an option to stick around a while longer in order to become vested before you quit your position, you probably should. Otherwise, you could be throwing away thousands of dollars.

Regularly check for better investments

There are a couple of reasons why you should regularly be revisiting your 401(k). The first is that your employer may have started offering better investment options. If you do not check up on what is available, you will never know. The second reason is that your goals may shift as you get older. In the beginning, you will probably want to take on a higher level of risk with your investments. As you close in on retirement age, you will want to take money out of those riskier investments and move it to more conservative investments.

Search for hidden fees

You may be aware that 401(k) plans carry fees, but do you know how much they can add up to? Many people are shocked when they actually analyze their investments and see how much their fees are going to drain their savings over the years. It could easily add up to tens or even hundreds of thousands of dollars. If there are better choices available, you may want to consider changing your plan.

Managing your investments largely on your own isn’t easy. Your employer helps you out by contributing toward your retirement savings with a 401(k), but on the whole, you are on your own. It is up to you to understand the complexities and pitfalls of your 401(k) plan and to make the smart decisions which will give you the best chance at a comfortable retirement. Be sure to research more in-depth and read more 401(k) advice so that you can make the best choices. You can also read the IRS guide to 401(k) plans here.

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