4 Things That May Help Maximize 401(k) Savings in 2021
With pensions disappearing and the future of social security unknown, American workers are now largely responsible for their retirement savings.
For many employees, a 401(k) is their largest asset come retirement.
Yet, too many investors set up their 401(k), contribute each paycheck, and do little else with it.
Contrary to popular belief, growing your 401(k) savings is not a set-it-and-forget-it strategy. With a little time and effort, it’s easy to shorten the learning curve and take control of your financial future.
Keep reading for 4 things that may help maximize 401(k) savings next year.
#1 Have a Retirement Plan in Place
Let’s say you’re driving from Cincinnati to Phoenix.
Sure, you can get in the car and drive southwest. But without a map showing you the most direct route, chances are you will end up somewhere other than your intended destination.
The same applies to retirement.
You need to know where you are and where you want to go in order to achieve your retirement goals.
Otherwise, you run the risk of not having enough saved.
Think about this: If you had almost $200,000 average balance at retirement age and you were making $60,000 per year at your job when you retire, how long are these funds going to last you in retirement?
Will this give you the retirement you truly desire? For most, the answer is no.
Whether you are 30 or 10 years from retirement, it’s never too early or too late to get a plan in place.
Take time today to create a plan for retirement. If you created a plan years ago, but haven’t followed it, then create a new plan based on where you are right now.
Get clear on when you will retire and how much you’ll need for the lifestyle you desire.
From there, take a look at how much you’ve already saved and figure out what you need to do to get back on track.
If you need help creating a retirement plan, we recommend seeking out third-party help as soon as possible.
In fact, doing so sooner rather than later may have a significant impact on your retirement lifestyle.
A recent Morningstar report shows that participants who received expert guidance had as much as 40% more income during retirement versus those who received no Help at all.¹
Use our calculator to see how professional account management may improve your 401(k) account performance.
Before you reach out to a third-party expert, check out our guide that explains different types of financial advisor licenses and how they may affect the advice you get.
#2 Engage with Your 401(k) Savings
Have you ever found yourself thinking, “I thought my company took care of my 401(k) for me. I don’t need to do anything”?
This belief–whether it’s concerning your current or past employer–is all too common among 401(k) investors.
And it’s one that’s disconnecting investors like you from your money, and potentially keeping you from maximizing 401(k) savings.
While you might think you have better things to worry about than managing your 401(k), we encourage you to think again.
It’s up to you to make sure you have enough money for retirement. Yet, far too many people don’t understand what they are investing in.
Others don’t know how to read their 401(k) statement when it comes in the mail. Or even bother to look at it.
There are even some who think their employer takes care of their 401(k) for them, which is not the case.
If you really want to stay on track to potentially maximize 401(k) savings, we encourage you to become engaged with your investments.
When you gain the necessary knowledge, you may go from being a disconnected investor to one who is engaged with your 401(k) savings and the overall health and well-being of your financial future.
Here are a few ways you can enhance your 401(k) savings knowledge:
- Watch our 401(k) Masterclass videos. In as little as 13 minutes, you will discover 3 strategies that may supercharge your 401(k) performance.
- Open your 401(k) statements when they arrive.
- Ask your plan provider questions if you are unclear about your 401(k) investments. Check out this article: 5 Questions to Ask a 401(k) Plan Provider Sooner Rather Than Later.
- Learn how to read and understand a 401(k) statement and watch the video below.
#3 Plan Now to Save More Next Year
Another way to stay on track to potentially maximize 401(k) savings is to contribute more in 2021.
Employee 401(k) contribution limits are $19,500 for 2021. 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 is $6,500 in 2021.
If maximizing the contribution limit seems unreachable, that’s okay.
Time and consistency build wealth. Doing what you can today to save a little bit more each month may help more in the long run than you think.
Here are a few ways to maximize 401(k) savings:
- Contribute 1 – 5% More Each Pay Period: Review how much you’ve been contributing to your 401(k) or other workplace retirement account. Now, see if you can put in an additional 1%, 3%, or 5%. If you can go higher, do it.
- Increase Contribution Amount When You Get a Raise: If you have recently received a raise or expect one in the next year, make sure to increase your contribution amount.
- Meet the Company Match: Contribute at least the minimum of what your company will match because it’s basically free money to you. And, depending on what your company matches, it may double the amount of what you’re already saving.
Let’s say your company matched 100% up to 6% of your pay. With a $55,000 salary, you could put in 6%, or $3,300 for the year, and the company would match this at 100%.
That’s another $3,300 per year of free money that’s yours to keep. This extra $3,300 doesn’t include the compounding of returns over time. This is just about the additional money you could be saving with your company match.
- Contribute More When You Receive Cash Gifts or a Tax Refund: If you get a tax refund or large cash gift, put all or part of that money toward your 401(k) savings.
We recommend you contact Human Resources and tell them the amount you want to invest, and they will take it out of your paycheck(s). Then use the tax refund or gift money to live on and make up the difference during this time.
#4 Regularly Rebalance Your 401(k)
This tip to maximizing 401(k) savings doesn’t require investors to come up with more money.
It’s as simple as rebalancing your account quarterly.
Rebalancing is the process of realigning the weightings of the assets (your investments) in the portfolio.
This can involve periodically buying and/or selling assets in the portfolio in order to maintain the initial desired level of asset allocation.
For example, this would need to happen if maintaining a certain percentage amount of stocks and bonds was the desired goal.
If, over time, the stocks outperformed bonds, a person may need to sell off some of the profits created by stocks to buy more bonds, so the portfolio maintains the desired balance.
Therefore, a rebalancing of your portfolio may need to take place from time to time throughout each year.
Because unmanaged allocations may experience much larger losses in down markets and may miss the opportunity for growth during good markets.
Have questions or concerns about your 401(k) performance? Click below to book a complimentary 15-minute call with an advisor.
- David Blanchet, Head of Retirement, CFP, CFA, Morningstar 2014, “The Impact of Expert Guidance on Participant Savings and Investment Behaviors”