The Ultimate Guide To Getting More From Your 401(k)
Michael Klonsky, CFP?, AIF?
Michael Klonsky at Ameriprise Financial Services, LLC
Retirement 401(k) plans have become pretty commonplace. In fact, 41.2 million American households have at least one member that participates in a 401(k) plan through their employer. (1) Even though so many people have access to a 401(k), saving for retirement is still the number-one financial concern that Americans have. (2) Why is that?
While many people have access to a 401(k) plan through work, that doesn’t mean they know how to use it. How about you? Are you confident that you’re maximizing your 401(k)?
If you’re like most Americans, you can’t answer that affirmatively with complete confidence. I understand, it’s complicated stuff. Let me help. Here are some ways that you can get more from your 401(k) and think about retirement with confidence.
Calculate Your Maximum Contribution
The IRS sets limits on how much you can put in your 401(k) account each year. For 2019, it is $19,000. However, most people contribute to their accounts based on a percentage of income. If you’re putting in, say, 8%, do you know the total dollar amount that will come to for the year?
Most people don’t take the time to calculate how to max out their account each year. In 2017, only 13% of participants contributed the maximum to their accounts. (3) To take full advantage of the tax benefits offered through a 401(k) program, you need to contribute the maximum allowed and you can only do that if you take the time to calculate how to do that first.
Take Advantage Of Catch-Up Contributions
While I just said that the maximum contribution for 2019 is $19,000, that’s not actually true for everyone. If you are age 50 or older, you are eligible for additional contributions called catch-up contributions. For 2019, those who are 50 or older can contribute an extra $6,000 for a grand total of $25,000 in contributions for the year.
Get Your Full Match
One popular benefit that many employers offer in conjunction with their 401(k) plan is matching contributions. It’s a way to reward employees and also encourage them to save for their future. If your employer offers matching contributions, that is free money. Who doesn’t want free money? Yet so many people don’t contribute enough to earn their employer’s full match.
You need to contribute enough to your 401(k) to get the full match. It’s also important to understand your employer’s vesting schedule. Some companies make you wait several years until the money is actually yours. If you know the vesting schedule, you can be careful not to leave just months before the money becomes yours.
Auto-Escalate Your Contributions
It’s hard to start saving if you aren’t used to it. Every dollar that goes into your 401(k) may be a dollar that you were used to spending. Because of this, many people have more success when they ease their way into saving.
If your employer offers auto-escalation of contributions, it’s a great way to get yourself to the level of savings you need to be at without feeling the pain. Set it up so your contributions increase 1% each year. Before you know it, you’ll be maxing out your account without even feeling the difference.
Keep Your Money Invested
The great thing about 401(k) plans is that they allow your money to grow in a tax-advantaged manner. You only get a tax benefit, though, if your money actually grows. Otherwise, it’s just a holding place for money that is slowly eroding in value due to inflation.
If you want your money to grow, then it has to be invested. It won’t do you a lot of good just sitting in a money market fund. Yet, investing can be very intimidating, even paralyzing. If that last sentence rang a bell with you, simply put your money in a target date fund or work with a financial advisor to help you invest it. Also, make sure you roll over old 401(k)s from previous employers to keep that money invested and working for you.
Pay Attention To Fees
In addition to having your money invested to grow, you need to make sure that you aren’t paying so much in fees that you don’t have much left to grow. While the numbers may seem small, they can make a big difference over the long run.
When paying a fee of .25%, $100,000 invested for 20 years will grow to almost $210,000. Up the fee just a little bit to 1%, and what happens? That same $100,000 only grows to $180,000. (4) That small difference in fees, not even a full percent, costs you almost $30,000.
Educate Yourself
Most people have never taken a finance course, which is why so many people are uncomfortable managing their own 401(k)s. However, most employers and 401(k) providers offer a lot of good educational resources. Whether it is a class, seminar, or self-directed reading, take some time to educate yourself. This will not only help build your confidence, but you’ll likely end up making wiser decisions as a result.
Speak Up
I’ll be honest here. Some 401(k) plans just stink. They only offer poor investments or high fees or difficult terms. How do you maximize a bad 401(k)? Speak up and get it changed! Remember, your employer is paying money for this retirement plan because they want to help you. If it isn’t helping you, let them know. There’s a good chance they simply aren’t aware. Talk to your HR department and ask for improvements; both your coworkers and your future retired self will thank you.
Work With A Professional
While you can learn a lot from the resources your company provides and the internet, it still can’t compare to an in-depth financial education and years of experience. The only way to know for sure that you’re getting the most out of your 401(k) plan is to work with an experienced financial planner. If you want a professional opinion about how your 401(k) is doing, give me a call at 978-739-4900 or email [email protected].
About Michael
Michael Klonsky is a CERTIFIED FINANCIAL PLANNER? practitioner and Accredited Investment Fiduciary? designee with more than 20 years of experience working with individuals, families, business owners, and professionals. He specializes in guiding his clients to a financial investment plan customized to their needs, empowering them to take control of their retirement savings. Michael graduated from Ohio Wesleyan University and spends his spare time staying involved in his community. Mike is a past president of the Massachusetts chapter of the Lymphoma Research Foundation. He dedicated his 2012–2013 triathlon season to raise money for the Massachusetts General Hospital’s Cancer Center. Mike is training to swim the English Channel in August 2020 to continue his fundraising for the Cancer Center and to help fight childhood hunger in the United States. Mike was recognized as a 2010 Massachusetts General Hospital Cancer Center honoree for being one of the 100 individuals whose diligence, philanthropy, and passion have helped advance the fight against cancer. Mike enjoys staying involved with his children’s many sports teams, participating in open water swimming, and skiing. He and his wife, Toni, reside on the North Shore of Boston with their children. To learn more about Mike, connect with him on LinkedIn.
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New England Wealth Management does not provide legal or tax advice. You should consult a legal or tax professional regarding your individual situation.
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(1) https://medalerthelp.org/401k-stats/
(4) https://www.sec.gov/investor/alerts/ib_fees_expenses.pdf