11 Ways to Get the Most out of 401(k) Savings

Whether you’ve been contributing to your retirement savings for only 10 months or 10-plus years, you want to get the most out of your 401(k)

If you’re like most investors, your 401(k) can represent a significant portion of your assets. 

For many, it is the largest asset. 

Protect your money and set yourself up for a retirement where you thrive, not just survive. Check out these 11 pro tips on how you may get the most out of your 401(k) savings. 

#1 Participate in Your 401(k) as Soon as You Are Eligible

 get the most out of your 401(k)

 
Some companies require you to work for a specific amount of time before you are eligible to enroll in the company’s 401(k) plan, while others may require you to work for over a year before you can participate. 

Should you start a new job this year, make sure you know when you are able to participate and be prepared to enroll as soon as you are eligible. 

Don’t expect your plan representative to track you down when it’s time to enroll. 

If there is a year-long wait period, consider opening an Individual Retirement Account (IRA) and save on your own while waiting. 

[Read 6 Questions to Ask Before Signing Up for a 401(k) Plan]

#2 Don’t Stay with the Default Plan 

 get the most out of your 401(k)
 
Despite the time requirement for enrollment, more and more employers are automatically enrolling employees in their 401(k) plans. 

In fact, more and more companies’ 401(k) plans use target date funds (i.e., 2020, 2030, 2040 funds) as their default option, or Qualified Default Investment Alternative (QDIA).

They can legally do this thanks to The Pension Protection Act of 2016, which enabled employers to direct plan participants’ assets into a target date fund and not be liable–should the employee not select an investment.  

Marketwatch states, “About 70% of U.S. companies automatically enroll employees into 401(k)-type plans, and more than 86% of these firms now direct people’s money by default into ‘target-date funds’ (TDFs).”¹

Because target date funds (i.e., 2020, 2030, 2040, 2050 funds) are based on the date of retirement, they fail to take into consideration that not all investors are created equal. 

If you’re younger and plan to retire in 2060, you’re told to select a 2060 fund. If you’re wanting to retire in 2030, you’d select a 2030 target date fund. 

What this means is that investors are grouped solely based on their expected retirement date–location, profession, salary, risk tolerance, goals, and objectives are NOT taken into consideration

Because everyone has different goals and objectives for the future, there is no one-size-fits-all way to invest in a 401(k) plan

In addition, target date funds may not appropriately manage downside risk. 

They may often underperform in good markets and do a poor job of managing downside risk during tough markets. 

According to Morningstar analyst Jeffrey Holt in March 2018…

 “In the long run, the biggest risk in target-date funds is that they won’t meet investor expectations for avoiding losses.”²

If you are currently in a target date fund and want to get the most out of your 401(k), we suggest moving away from this option and better utilizing all the options available in your workplace retirement plan. 

[Read Are Target Date Funds Good or Bad?]

#3 Know Your Plan’s Vesting Schedule

 get the most out of your 401(k)
 
If you plan on leaving your job this year, it’s critical you know your company’s vesting schedule

While the money you personally contribute is 100% vested and yours to keep, the amount your employer matches isn’t always yours right away. 

Some companies have a cliff schedule that requires you to stay employed for a specific amount of time before the money the employer contributed to your match is yours. 

Others have a graded vesting schedule, which means you receive a certain percentage of vesting after a specific time working for the company. 

Some employers let you keep employer contributions as soon as they are made. 

If your employer’s 401(k) plan does not let you keep employer contributions as soon as they are made, then you want to plan accordingly and know your vesting schedule.  

Should you change jobs before you are fully vested, you will have to return part or all of the money your company contributed to your account.  

[Read What Every Investor Needs to Know about 401(k) Vesting]

#4 Increase Your 401(k) Contribution Limit 

 get the most out of your 401(k)
 
Employee 401(k) contribution limits for 2020 are up from $19,000 in 2019 to $19,500. This applies to 401(k), 403(b), most 457 plans, and the federal Thrift Savings Plan. 

For those age 50 and older, the 401(k) catch-up contribution limit will also increase $500–from $6,000 in 2019 to $6,500 in 2020.³

Let’s be honest. Not everyone can max out their 401(k) contribution limit each year. 

Between cost of living, family obligations, debt, and rising healthcare costs, saving for retirement may often feel like squeezing blood out of a turnip. 

No matter your financial situation, you can make more of a difference in your retirement savings than you might think just by saving 1% more than you did last year. .  

Better yet, stretch yourself and save 2 – 5% more than you did last year.

Let’s say you earn $55,000 a year. 

  • If you saved 1% of your salary, you’d save an additional $550 a year, or $45.83 per month. 
  • If you saved 3% of your salary, you’d save an additional $1,650 per year, or $137.50 each month.
  • If you saved 5% of your salary, you’d save $2,750 more each year, or $229.17 each month. 

Add this to what you contributed last year, and you can see how bumping up your savings by a few points may make a big difference in your retirement savings. And help you get the most out of your 401(k).

Here are three easy ways to find more money to contribute to your 401(k): 

  • If you get a raise this year, designate the extra income for retirement savings and directly put it into your 401(k). This way you will never miss the extra money. 
  • Cut back on expenses to free up additional savings. Even if you cut back on one or two expenses, it adds up over time and can make a big impact in your 401(k) nestegg. For example, cutting $85 out of your budget and instead applying it each month for 12 months to your 401(k), you would end up with $1,020 extra saved in a year’s time.
  • If you receive a tax refund this year, immediately invest that into your 401(k). You  will need to go through payroll deduction to do this. We recommend you contact your Human Resources department, let them know the amount you want to invest, and they will take it out of your paycheck(s). Then use your tax refund to live on and make up the difference during this time. 

[Read How to Easily Boost Retirement Savings This Year]

#5 Regularly Make Changes to Your Investments

 get the most out of your 401(k)
 
Contrary to what some investors believe, a 401(k) plan is not a “set it and forget it” program.

Because of this belief, few people rebalance their 401(k) accounts, and even those who do fail to manage risk through proper asset allocation.

In fact, 80% of 401(k) investors fail to rebalance.

Rebalancing only the percentages of current holdings does not consider current market and economic conditions. 

The stock or mutual fund that you chose last year–or even last quarter–may or may not necessarily still be going in the right direction for you. 

Failing to rebalance may also result in more significant losses during bad markets

With that in mind, properly allocating and rebalancing your retirement account–based on your specific objectives–can be extremely advantageous. 

To get the most out of your 401(k), we recommend rebalancing your account allocations every quarter, or four times a year

This will ensure you regularly course correct and stay on track to meet your retirement goals

[Check out our guide on Rebalancing vs Asset Allocation and discover how balancing and allocation may affect your 401(k) performance.]

#6 Properly Assess Your Risk Tolerance

 get the most out of your 401(k)
 
There’s a common belief of investing that says that if you want safety and security, you have to sacrifice good returns. 

This belief can be very costly–especially if you’re close to retirement. 

If you want your portfolio to grow, you want to hold both stocks and bonds. 

Morningstar reported that, “Since World War II the S&P 500 stock index has returned 11.1 percent, which is 7 percentage points more than the CPI. Even if future returns don’t match those gains, equities are still likely to outperform other assets over the long term.”⁵

According to Morningstar’s Head of Retirement Research, David Blanchett, “A 50-50 stock and bond mix, which gives you growth and income, is a good starting point for retirees.”⁶

Other advice, especially given to older investors, is to build up cash savings so, if the market takes a dip, you have cash on hand and can avoid tapping into your depleted investment portfolio. 

The downside to cash is that most money market accounts pay little to no interest. 

So, if you’re cash rich, you risk losing value due to inflation. 

While it’s important to reallocate your investments per your tolerance to risk, if you are too cautious, you risk coming up short when you retire because you aren’t able to maximize growth

[Read The #1 Correctable Behavior Studies Repeatedly Show Improves 401(k) Performance by 3%]

#7 Contribute Enough to Get Your Employer Match

 get the most out of your 401(k)
 
Company matching is one of the best ways to get the most out of your 401(k)

If you can’t maximize your annual contribution, at least put in enough to get the full company match. 

Because when your company matches you, it’s like getting free money.  

If you aren’t doing it already, you may be leaving a lot of money on the table. 

Meeting the company match may increase your retirement lifestyle

And it may help you accumulate the amount of money you need at retirement. 

You may not have to wait for enrollment season to make changes to your 401(k) deferral election. Check with your HR department to see when you can make changes.

#8 Avoid Cashing Out or Borrowing 

 get the most out of your 401(k)
 
Saving for retirement is a long-term game. Any money you borrow to meet an immediate financial need makes it difficult to make up for lost time

Say you decide to borrow $6,000 and you pay it back over 5 years, contributing $100 monthly. 

The balance after 5 years of repaying it back, assuming a 7% rate of return, would be $7,202. 

Had you left the $6,000 in the account with a 7% growth rate, and contributed $100 each month for 5 years, you would have an average of $14,948.

Hopefully you can see from the above example why you want to avoid borrowing against your 401(k). 

Avoid cashing out your 401(k) as well. Some people who leave a job opt to cash out their 401(k), especially if the balance is low. 

Instead, consider rolling over your old 401(k) into your new one or into an Individual Retirement Account (IRA). Doing so may help avoid withholding taxes and potential penalties. 

[Check out our 5 Costly 401(k) Rollover Pitfalls]

#9 Avoid Taking Early Withdrawals

 get the most out of your 401(k)
 
You must be at least 59½ years old if you want to take distributions from your 401(k) without paying early withdrawal penalties to the IRS. 

Ideally, you wouldn’t take a withdrawal until you retire. 

However, if you withdraw money before age 59½, you will have to pay income tax on the amount you withdraw plus a 10% early withdrawal penalty. 

Depending on your tax bracket, this could almost cut your withdrawal in half after penalties and taxes. 

You will need to ask your plan representative or HR to see if your 401(k) plan allows hardship withdrawals. Not all plans offer this option. 

Some 401(k) plans allow for early hardship withdrawals for…

  • Burial or funeral expenses
  • Unexpected medical expenses
  • Costs associated with purchasing a new home 
  • Expenses for repair or damage to your home
  • Tuition and educational fees and expenses
  • Payment to prevent eviction or foreclosure on your home

Meeting one of the criteria above does not mean you’re exempt from paying penalties

It’s also important to know that, should you take a hardship withdrawal, you are not allowed to make contributions to your 401(k) plan for 6 months

You will have to pay income taxes on and have to pay the 10% penalty, unless you meet one of the following early withdrawal penalty exceptions:

  • If you are “separated from service.” If you lose or leave your job at age 55 or later and no longer work for the sponsoring employer, you won’t have to pay the 10% penalty from the 401(k) associated with the job you recently left. 
  • If you become disabled. 
  • If you withdraw an amount less than is allowable as a medical expense deduction. 
  • If you are required by a court order to give the money to your divorced spouse, a child, or a dependent. 

A new provision for penalty-free withdrawal provided by the SECURE Act, which just passed late 2019, also allows parents who have a baby or adopt a child to take early withdrawal of up to $5,000 from a 401(k) without the 10% penalty. 

Each parent can use the $5,000 exemption, meaning a couple can take out $10,000 penalty-free from their 401(k)s.  

This is not a loan, and parents can opt to repay the withdrawal amount or not. 

The above exceptions still require you to pay income tax on the amount withdrawn, just not the 10% penalty. 

#10 Know Your Fees

 get the most out of your 401(k)
 
As a 401(k) investor, it’s important to understand the fees you’re being charged because they may impact your portfolio’s performance over time

According to a late 2018 TD Ameritrade survey, only 27% of investors know how much they are paying in 401(k) fees while 37% didn’t even realize they were paying fees.⁷

401(k) plan fees can vary greatly and depend on the size of your plan, the plan provider, and number of participants. 

Your 401(k) plan provider is required by law to disclose all fees in the prospectus and in the year-end statements. So, make sure you take the time to review your statement and know the fees you’re paying.   

[Check out our guide on How to Supercharge Your 401(k) Performance Today ]

#11 Seek Independent Third-Party Advice 

 get the most out of your 401(k)
 
If you broke your leg, you wouldn’t try and reset it yourself, would you? 

Unless you are an electrician, you wouldn’t try and wire your new home (at least we hope you wouldn’t!). 

So why would you leave your largest asset to chance when you could seek expert third-party advice

Utilizing an expert for help with investing and allocating your 401(k) could potentially change the performance of your account from good to great. 

If you don’t think you have enough money saved or you think you’re too close to or too far away from retirement, don’t let that stop you! 

In a 2014 Morningstar report, David Blanchett, CFA, CFP, and Head of Retirement Research, stated that participants that received expert guidance had as much as 40% more income during retirement versus those who received no help at all.⁸

What could you do with 40% more income at retirement

Really think about it for a moment.  

  • Would it mean the difference between struggling to make ends meet or living comfortably? 
  • Could you take those dream vacations instead of just visiting family? 
  • Would you be able to do what you wanted with your days instead of working part-time? 

If you really want to get the most out of your 401(k), find a financial advisor who can help you get from where you are to where you want to be. 
The type of advice you receive about your finances may be impacted by the type of advisor you resource for advice. 

Check out our no-cost guide on how to understand The Different Types of Licenses Financial Advisors Have and What They Mean to You .

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Sources:

  1. MarketWatch, Opinion: Target-date funds are more expensive and less effective than this simple investment plan, February 20, 2019
  2. Special Report: Fidelity puts 6 million savers on risky path to retirement, Reuters.com March 5, 2018
  3. https://www.irs.gov/newsroom/401k-contribution-limit-increases-to-19500-for-2020-catch-up-limit-rises-to-6500
  4. “Over 90% of Americans make this 401(k) mistake”, Mauri Backman, The Motley Fool
  5. David Blanchet, Morningstar Analyst 2014, “The Impact of Expert Guidance on Participant Savings and Investment Behaviors”
  6. David Blanchet, Morningstar Analyst 2014, “The Impact of Expert Guidance on Participant Savings and Investment Behaviors”
  7. https://www.investopedia.com/articles/personal-finance/061913/hidden-fees-401ks.asp
  8. David Blanchet, Morningstar Analyst 2014, “The Impact of Expert Guidance on Participant Savings and Investment Behaviors”

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