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Ways to maximize your 401(k)

By Jennie L. Phipps · Bankrate.com
Monday, March 12, 2012
Posted: 2 pm ET

Check out Bankrate's Fundamentals of Retirement Plans package of stories posted today by my colleague and Bankrate's assistant managing editor, Barbara Whelehan. It's a terrific guide to workplace-based retirement planning and saving.

What we didn't talk about is ways to maximize your retirement savings in that all-important plan. Here are a few thoughts, most of them from Charles Epstein, principal in Epstein Financial Group and author of Paychecks for Life:

Start young. Check out this Bankrate 401(k) calculator.  Let's say you start saving 10 percent of your salary when you are 25 and earning $30,000. Your employer kicks in a match -- a common employer matching formula is 50 percent of  the amount an employee contributes, up to 6 percent of your total annual earnings. By the time you retire at 65, you'll have an astounding $1.4 million. Of course, that assumes that you keep your job, get 3 percent annual raises, and earn an average of 7 percent on your money. But even if you encounter some lousy years -- and who doesn't -- chances are you will have enough savings to avoid an all-kibble diet.

Don't be put off by big numbers. In the scenario above, the bottom-line difference -- that is the amount missing from your paycheck -- between saving 5 percent and saving 10 percent is less than $30 a week. As Epstein points out, the total tax break for retirement savings is about 30 percent. For instance, if you contribute $1,000 to your company's 401(k) plan and get a matching contribution of $500, you'll have $1,500 in your account. That qualifies you for a $500 reduction in your taxes, which means it  costs you only $500 to add $1,500 to your retirement savings.

Watch your costs. Epstein calculates that a 0.5 percent difference in your costs can reduce your lifetime return in the scenario above by as much as $200,000. By August, your employer should be making these costs clear. Don't neglect to consider this factor.

Check out target-date funds. These mutual funds are popular 401(k) choices because they take the guess work out of managing your money by automatically adjusting your investments to something more conservative as you age. Epstein says avoid the ones that have a glide path that goes past your likely retirement date.

Consider an annuity. More employers are making annuities within your 401(k) a sensible thing to consider doing. Epstein says that right now, only a few annuities within 401(k)s are portable, but the industry and the government are working together to change that. Once you can move your in-plan annuity from employer to employer, this will be a good way to ensure you have a predictable retirement income.

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