The 401(k) is one of the most well known investment accounts geared towards saving for retirement. In our experience as advisors, we’ve seen many clients utilize this account, but fail to to truly maximize their investments. In this blog post, we will cover five tactics to get the most out of your 401(k).
1. Start Contributing as Early as Possible
Many young adults who are starting off their career forgo saving for their retirement since it seems so far away. However, early contributions at this time can make the largest difference for their retirement. With the help of compounding interest, a $10,000 investment into a 401(k) at age 20 with an average 10% yearly gain can grow to a whopping $452,592.56 after 40 years.
2. Take Advantage of the 401(k) Match
Many employers offer to match your 401(k) contributions up to a certain percentage. While your contributions come from your own paycheck, the company match is added by your employer. Essentially, you are turning down FREE money and future returns if you don’t invest in your 401(k). One best practice is to add at least the amount that allows you to take advantage of the full match.
3. Stay Until You Are Vested
There are a number of employers who have a vesting schedule for their employees when contributing to a 401(k). Vesting is a retirement plan feature in which participants gain ownership of an employer contribution after a certain number of years of employment. Typically, this is how employers incentivize employees to stick around. If you were to leave before being 100% vested, you could potentially lose out on some or all of the free money your employer has given you.
If you are in a situation where you are not happy with your job or there is a better opportunity for you, it may be beneficial to sacrifice the unvested portion of your 401(k).
Note that all of your contributions from your own salary are 100% vested.
4. Diversify with A Roth 401(k)
A growing number of employers now offer a Roth 401(k) option for employees to invest after-tax dollars. This is a great way to invest for tax free growth for retirement. We did want to note that this generally offers bigger benefits to those who are young and in low-income tax brackets who expect to be in a higher tax bracket later in their career and in retirement. A Roth 401(k) can also add tax diversification and flexibility to investors’ total portfolio later down the road.
5. Rebalance Your Portfolio
As you contribute to your 401(k), it is typically a good idea to regularly rebalance your portfolio to match with your risk tolerance and time horizon. As you approach retirement, you should shift the holdings within the account to less-volatile investments to preserve the nest egg that you’ve worked hard to grow. On a side note, the worst thing that one can do is be too aggressive or too conservative for your risk tolerance and time horizon towards retirement.
After reviewing these 5 tactics, we hope you have a better understanding of how to get the most out of your 401(k). If you have any questions or are looking for advisors to manage your account, please reach out to Tori and Alex for a meeting.
Best,
Brandon