Retirement Advice on Living Comfortably Off of Your 401(k)

Written by , January 24, 2014

Retirement Advice on Living Comfortably Off of Your 401kThe 401(k) and the Individual Retirement Account are the cornerstones of any solid long term retirement savings plan. Both of these accounts have a number of different characteristics that can provide value that will yield significant results in retirement. But your 401(k) plan at work likely has some advantages over the IRA structure.

When you focus on building your 401(k) you’re greatly increasing the chances that you’ll be able to live comfortably off your own savings once you enter retirement. In fact, the best way to be able to rely upon your 401(k) account is to maximize it in the years leading up to your retirement age.

Here is some retirement advice to help you live comfortably of your 401(k) funds.

  • Consider Maximizing Your 401(k) Contributions. It’s important to maximize your 401(k) contributions each and every year that you have the account. In 2014, the annual contribution limit for 401(k) accounts is $17,500 (or $23,000 if age 50 or older). In contrast, an individual’s contribution limit to their IRAs for 2014 is only $5,500 (or $6,500 for individuals aged 50 or older). Over time, this gives you the opportunity to build your account as large as possible.
  • Employer Matching. Another way to be sure that you’re maximizing the value of your 401(k) is to take full advantage of any employer match that may be available to you. Even if you’re not able to contribute the maximum amount in a given year, at least be sure to contribute the amount that will yield the maximum matching contribution from your employer.
  • Don’t Ignore Your Account. Your 401(k) plan is like any other investment account you own. Periodically evaluate your investment decisions to make sure that they’re performing up to your assumptions, and that you wouldn’t do better by investing elsewhere.
  • Don’t Borrow Against It. It’s not uncommon for an employer’s 401(k) plan to include a provision that allows the employee to borrow against the value of their account. After an employee takes out such a loan, they repay their own account the amount that they borrowed. Even though interest is charged on the loan, the employee simply repays this amount into their own account.
    • However, borrowing against your 401(k) is generally a bad idea for several different reasons. First, when your account balance is smaller because of loan you’re not gaining from your investments. Second, borrowing can create a mindset that your 401(k) is a suitable source of funds for purposes other than retirement. In addition, if you leave your job before your 401(k) loan is repaid then you’ll be responsible for repaying the outstanding balance immediately, and failure to do so can result in significant tax penalties.

    Finally, remember that your retirement planning doesn’t stop once you leave the workforce. Getting to retirement with a large nest egg is essential, but you also need to have a plan for an appropriate lifestyle during your retirement years. By maximizing your 401(k) balance in the years leading up to retirement you’ll have the best shot of reaching your goals.

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