Here are the Best Strategies to Maximize Your 401(k)

Are you feeling uncertain about your retirement savings?

You're not alone. In fact, according to CNBC, “Stock market returns are up and, thanks largely to automatic enrollment plans, investors are saving more than they did in the past…account balances for the median 401(k) of a person approaching retirement (65+) remains very low.” According to the findings of the latest Vanguard report How America Saves, “Americans are still very reliant on Social Security for a large chunk of their retirement.”

Preparing now will make a significant difference to your retirement. Whatever stage you are at in life, whether you're a high earner expecting to accumulate more wealth (HENRY) or nearing retirement, the right strategies can make a significant impact on the comfort of your retirement.

NestEgg is a platform dedicated to offering pointers to help you make the best financial decisions. Whether you’re here for free financial tips on what you should do to maximize your 401(k) or are looking for further financial consultation, NestEgg can help you.

Let's break down what you can do to secure your financial future.

Fundamentals to Maximizing Your 401(k)

‍Start Contributing Early

The earlier you begin contributing to your 401(k), the more time your money will have to grow through compounding interest. Common sense, right? But many Americans put off contributing until later on. Look at contributions to your 401(k) like a subscription – a gym membership, insurance, etc. Why not aim to put at least 10% of each paycheck into retirement savings.

Fidelity offers a marker on where you should be at:
‍

- At age 30: Aim for 1 times your annual salary saved

- At age 40: Aim for 3 times your annual salary saved

- At age 50: Aim for 6 times your annual salary saved

- At age 67: Aim for 10 times your annual salary saved
‍

Maximize Your Employer Match

One of the quickest ways to boost your 401(k) is to make the most of your employer match program.

Q: What is an employer match 401(k) and how can you take advantage of it?

A 401(k) match occurs when your employer adds funds to your 401(k) account, corresponding to the contributions you've made from your earnings, such as your salary and bonuses. This is essentially free money and part of your 401(k) compensation package. For example, if your employer offers a 50% match up to 6% of your salary, you should aim to contribute at least 6% to capture the full match. Not doing so is like leaving money on the table.

Increase Your 401(k) Contributions Regularly

Of course, we all want to enjoy life now. It’s normal to want to reward ourselves for a hard-earned bonus or pay rise. But think about your nest egg. Imagine if you were to forgo a big purchase that’s more of a want than a need to invest in your future, in your nest egg.

As your career progresses and those pay increases and bonuses come along, consider the benefits of increasing your 401(k) contributions. As we mentioned earlier, contributing at least 10% of your salary for retirement is ideal; contributing 15% of your salary to your retirement nest egg is even better. And this includes any employer match.

Don’t worry if this level of contribution is not feasible right now. Trying to increase your contributions incrementally, without putting financial strain on your family, is all moving in the right direction. Even increasing your contributions by 1% incrementally will add to your nest egg and alleviate money concerns during retirement.

Best Investment Options for a 401(k)

Q: What is the best investment in a 401(k)?

Selecting the best investment to maximize your 401(k) growth potential depends on the plan you opted for. Most 401(k) plans offer a range of options. Your plan likely includes options to invest in stocks, bonds, mutual funds, and target-date funds.

Diversify Your Portfolio

As the phrase goes, “Don’t put all your eggs in one basket.”

If you want to protect your investment, your nest egg needs to contain various kinds of eggs, as it were. Spread your investments across various asset classes to mitigate risk. During the 2008 crash, 401(k) plans that were heavily invested in target-date funds and were close to retirement lost a total of 20 percent of their value; market volatility could mean 2008 could repeat in the future. Spreading the risk gives your money a greater chance of performing well, even during a financial crisis.

Consider Target-Date Funds

Although the above stat seems alarming, don’t write off target-date funds altogether. If you prefer a hands-off approach, with the right financial guidance, target-date funds can work in your favor. Target-date funds automatically adjust the asset mix as you get closer to retirement age. These funds provide access to diverse markets, offer both active and passive management options, and include various asset allocation choices. Despite their straightforward nature, investors utilizing target-date funds should remain vigilant about asset allocation, fees, and investment risks. If you have any questions on target-date funds, get in touch.

Evaluate Performance and Fees

Evaluating the performance and fees of your 401(k) is crucial. Regularly assessing the performance of your 401(k) investments ensures they are growing adequately to meet your retirement goals. If certain investments are underperforming, your nest egg is suffering. You might need to adjust your portfolio to better-performing options to maximize your savings.

By controlling costs, you forgo the risk of investment fees eating into your retirement savings. By monitoring and comparing the fees of different funds within your 401(k), you can switch to lower-cost options, ensuring more of your money remains invested and growing.

Keeping your retirement goals in mind when analyzing the performance and fees of your investments is key. Life changes, and as you progress through different life stages, your financial goals and risk tolerance may change. Evaluating your 401(k) performance helps you ensure that your investment strategy remains aligned with your retirement timeline and risk appetite.

Spotting potential issues early can help you identify potential issues. This could include funds consistently underperforming or rising fees. You can do this alone, or a professional can offer guidance, allowing you to address these problems before they significantly impact your retirement savings.

Being proactive will be the key to making informed decisions. Staying informed about the performance and fees of your 401(k) investments allows you to make better decisions about rebalancing your portfolio, changing your contribution allocations, or selecting new funds. This objective approach can enhance the efficiency and effectiveness of your retirement savings strategy.

By regularly evaluating both performance and fees, you can optimize your 401(k) plan, reduce unnecessary costs, and stay on track to achieve a comfortable and secure retirement.

Reducing Investment Risk As You Approach Retirement

As you approach retirement, hopefully, your investments over time will have paid off. Now is the time to consider shifting your investment strategy to focus more on protecting the capital built into your nest egg rather than prioritizing aggressive growth. What this means is that you should now gradually reduce exposure to stocks and increase your investments in bonds and other lower-risk assets. This strategy will help protect your nest egg from market volatility when you are close to enjoying your retirement.

Younger investors have more time to recover from market losses. However, as you approach retirement, the time to recoup any losses decreases.

A more conservative investment approach can provide more stable and predictable returns, which is essential for planning your retirement income. This predictability helps ensure you have the necessary funds to cover your expenses once you stop working.

Reducing risk can also provide peace of mind, allowing you to feel more secure about your financial future. Knowing your retirement savings are less exposed to market fluctuations can reduce anxiety and help you enjoy your retirement more.

As you transition into retirement, you'll start withdrawing from your retirement accounts. Lower-risk investments can ensure that the money you need is available when you need it, without the risk of having to sell assets at a loss.

Why Should You Avoid Early Withdrawals From Your 401(k)?

We get it, it’s tempting to release equity from our retirement savings for that big purchase. But by avoiding early withdrawals from your 401(k), you can preserve your retirement savings, benefit from compounding growth, and ensure greater financial stability in your retirement years. Think long-term.

If you withdraw funds from your 401(k) before age 59½, you typically incur a 10% early withdrawal penalty. This penalty significantly reduces the amount of money you get to keep. Additionally, early withdrawals are also subject to federal and state income taxes. Since 401(k) contributions are made with pre-tax dollars, any money you withdraw early is treated as taxable income, potentially bumping you into a higher tax bracket.

One of the main benefits of a 401(k) is the power of compounding. Money left in your 401(k) account can grow your nest egg exponentially over time as it earns returns on both the principal and the accumulated interest. Early withdrawals reduce the principal amount, diminishing the potential for future growth.

Taking money out of your 401(k) early means you will have less saved for retirement. This can jeopardize your financial security in retirement and might require you to save more aggressively later or delay your retirement plans.

Think also about the opportunity costs. The funds withdrawn early are no longer invested, meaning you miss out on potential market gains. Even if you reinvest the money elsewhere, you may not achieve the same tax-deferred growth offered by a 401(k).

If you withdraw funds early, it may affect your ability to continue contributing to your 401(k), potentially forfeiting any future employer matching contributions.

Avoiding early withdrawals helps instill financial discipline. It encourages you to seek alternative solutions for financial emergencies, such as building an emergency fund or using other savings, rather than tapping into your retirement funds.

What is Roth on a 401(k) and Why Should You Consider It?

Q: What is a Roth 401(k) option?

Unlike a traditional 401(k), contributions to a Roth 401(k) are made with after-tax dollars, which means withdrawals in retirement are tax-free. If your employer offers a Roth 401(k) option, consider whether it makes sense for your financial situation. The Roth 401(k) option can be particularly advantageous if you expect to be in a higher tax bracket in retirement.

Consider Professional Advice

If this article has left you with more questions, that’s okay. Understanding the nuances of 401(k) investment options can be overwhelming. Seeking professional advice can help you make informed decisions. A financial planner can point you in the right direction and provide personalized insight into your specific situation. Opting for professional advice can ensure you are maximizing the growth of your 401(k) investments with strategies tailored to your nest egg growth goals.

Retirement should be something we all look forward to. Planning retirement now will ensure those years ahead are filled with enjoyment and well-earned rest.

Seeking expert guidance? Complete this form and connect with a qualified financial professional to understand your options and effectively and take control of your financial future.

‍