Today, building a nest egg for tomorrow’s retirement involves a layered approach. For example, employees of the United States Postal Service may be able to count on benefits from the Federal Employment Retirement System, Social Security and Thrift Savings Plan. Meanwhile, employees of other organizations may rely on individual retirement accounts (IRAs) and employer-sponsored 401(k) plans, in addition to Social Security.
The 401(k) is a very popular retirement plan as it may be part of your employee benefits package. Here's how to make it work for you.
As you work for an organization, your employer can set aside regular contributions from your gross paycheck as contributions toward growing your 401(k) account. These contributions are made before taxes are calculated on your pay, which means putting these funds aside for retirement reduces your current tax obligation.
The Internal Revenue Service limits how much you can contribute to your 401(k) each year. For 2023, that limit is $22,500, and if you are age 50 or older, you can make what is called a catch-up contribution of an additional $7,500 for a total of $30,000. Employees can contribute as much as they want up to this maximum. Employees who aren’t able to contribute the maximum early in their careers may be able to catch up over time as they advance in their careers.
For employees participating in 401(k) plans, some employers will match a portion of employee contributions. These matches are commonly calculated by percentage. For example, a company may match up to 2% of your salary in contributions, provided you contribute at least that much to your 401(k). Employer matches are a great perk that acts as a compensation raise for the future, helping you build retirement savings faster and giving you an extra incentive to put away as much as you can.
Once you have put money into a 401(k) plan, you need to invest it. Investment options depend on the firm providing your account but typically offer a selection of mutual funds across a wide range of investment types, including domestic stocks, foreign stocks, bonds and more. Sometimes you can take advantage of time-based mutual funds that invest your money in diversified assets at a risk level that is based on how many years you have left before retirement. As you near retirement age, your investments become more conservative with less risk. However you choose to invest your 401(k) funds, be sure to diversify across a variety of asset types to help maximize your opportunities for growth and minimize risk.
At APCU, we want to see you succeed in retirement – and we have a variety of solutions to help you supplement your 401(k) nest egg. To explore your options, stop by any branch or give us a call at (404) 768-4126