How much have you put away for retirement? Most people have not put away nearly as much as they need to retire comfortably. According to a recent study by the Employee Benefit Research Institute, less than half of employees have done even rudimentary retirement planning. So how do you get started, you ask? Your company's 401(k) plan is a great way to get the ball rolling.
So What is a 401(k)?
A 401(k) plan is a long-term savings vehicle that allow investors to defer income taxes until the money is withdrawn at retirement. Investors under age 50 can contribute up to $16,500 annually and investors age 50 or over can contribute $22,000 annually. Because 401(k)s are usually provided through employers, some of whom provide a match, workers are typically given a list of investment options they can choose from. But they generally can't buy individual stocks or bonds.
Growth and Withdrawals
Since 401(k) plans are usually invested in the market, they rise and fall like other investments. The average 401(k) grew, on average, 8.7 percent per year between 1999 and 2006, according to a 2007 study by the Employee Benefit Research Institute. But that was before the stock market collapse of 2008, which presaged a deep recession.
Despite the market's ups and downs, you can boost your retirement savings by simply leaving the money alone until you can start taking penalty-free distributions at age 59½ or later. Withdrawing before then will involve a 10 percent penalty on top of income taxes (which are generally due regardless of your age). Investors can take out a penalty-free loan against their 401(k), but they'll have to pay it back with interest.
Getting Funds Out
The simplest way to avoid penalties is to hold off on withdrawals until you reach age 59½ or later. You must start taking distributions by age 70½ unless you're still working. Consult IRS Publication 590 to determine the distribution amount. You can track Track your 401(k) progress with Bankrate.com's 401(k) savings calculator.