With traditional pension plans fading away, the 401(k) is the easiest way to save for retirement. Think about it – the money is taken out of your paycheck before you even have the chance to spend it! Because of this, your 401(k) is most likely your biggest source of retirement savings; yet, over half of Americans don’t understand exactly how 401(k) plans work. Our goal is to change that. Here are five pieces of advice to consider when it comes to maximizing the benefits of your employer’s retirement plan.
5 Ways to Optimize Your Employer's Retirement Plan
- Contribute as early as you can. Time is your biggest ally when it comes to investing. Given the nature of compound returns, you are losing money by not saving as early as you possibly can in your career. The early bird gets the worm!
- At minimum, always contribute enough for the match. Did someone say free money? Matching contributions from your employer to your 401(k) account involve exactly that. If you aren’t taking advantage of your employer’s 401(k) match, take action now! Learn how your match works and at a minimum, set your contribution percentage to maximize your employer’s match. Don’t turn down free money!
- Consider using the Roth option in your 401(k). Hopefully, your 401(k) plan offers a Roth option. If it does, consider using this option instead of the traditional pre-tax option, especially in the early stages of your career, when you will likely be in a lower tax bracket than you will be in later in your career. Roth contributions are made with after-tax dollars, will grow tax-free for life, and allow you to make tax-free withdrawals when you pull the money out in your retirement years.
- Save as much as you can! Nobody complains about having too much money for retirement. In 2024, if you are under age 50, you can put up to $23,000 into your 401(k) plan, and if you are 50 or older, you can contribute an additional $8,000 in catch-up contributions for a total of $30,500 annually. We know that other life expenses quickly add up and often prevent us from being able to hit these max funding limits. That being said, what’s a good target deferral rate? We recommend striving to get to 10% as early as you can in your career. Once you hit the target 10% deferral rate, consider contributing an additional 1% to 2% annually to coincide with any salary increases until you reach the contribution limit. If and when you max out your 401(k) for a given year, look to a Roth or traditional IRA to make additional contributions towards your savings goals.
- Stay on top of your investment risk. Review your risk profile annually to ensure your asset allocation aligns with your risk profile. Your risk profile will most likely change as you get older and closer to retirement. In other words, be more aggressive in your investments early in your career and more conservative in your investments as you approach your retirement age. Know that you don’t necessarily need to monitor your investment risk on your own – many 401(k) plans offer target-date funds (TDFs) that automatically decrease the risk in your portfolio as you near retirement. Note that not all TDFs are the same, so make sure you do a little research on the funds available in your plan to ensure the funds align with your risk tolerance.
Final Thoughts
All of these tips considered, here are the most important pieces of advice to remember: Save as much as you can for your retirement, start saving as early as possible, and at a minimum, contribute up to your employer’s match in your 401(k) plan. The changes in employer-sponsored retirement plans over the years have shifted the burden of retirement savings from the employer to the employees, leaving your retirement in your own hands. Knowing that retirement savings involve a long-term perspective, don’t miss out on any opportunities for your money to work for you and grow over time.
Questions and/or interested in how this applies to your financial life?
Email us here: info@afsfinancialgroup.com.
