4 Ways to Maximize 401(k) Savings

September

September 23, 2019

In 401(k) Mistakes, Retirement Savings, Retirement Tips

It’s not enough to simply save. If you want the retirement lifestyle you desire, you have to maximize your 401(k) savings.

According to a newly published report, Americans are contributing more to their 401(k)s than in previous years.

Fidelity® 2019 Retirement Analysis reports the average 401(k) balance saw a 2% increase from $103,700 in Q1 2019 to $106,000 in Q2. The year-over-year average balance is up roughly 2% from Q2 2018.¹

The number of 401(k) millionaires also reached new levels, with a record 196,000 people with $1 million or more in their 401(k), up from 180,000 at the end of Q1 2018.²

It’s never too early or too late to up your retirement investing game. Keep reading for 4 ways to maximize your 401(k) savings.

#1 Maximize Contribution Limits Or Get as Close as You Can

maximize your 401(k) savings

If you want to maximize your 401(k) savings, do what you can to maximize your contribution.

The annual contribution limit has been raised to $19,000 for 2019 for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan. This is $500 over 2018.

For employees age 50 or older in the plans listed above, the additional contribution limit will stay the same for 2019 at $6,000. This means the annual contribution limit is $25,000 for those 50 or older.

If you are a small business owner and self-employed, the maximum contribution to your solo 401(k) is $56,000 in 2019. This is a $1,000 increase from 2018.

While meeting the contribution limit this year might seem like a stretch, do what you can to get as close as possible.

If you can’t maximize your 401(k) savings this year, here are two tips to help you get closer to your savings goals:

Meet the Company Match

For employees, 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.

It may increase your retirement lifestyle.

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

Here’s how your company match is so critical to maximizing your 401(k) savings…

Let’s say out of each pay your company will match 25%, up to 3% ⁹ of your annual pay.

If you make $40,000 a year and you put in 3% ⁹ automatically into your 401(k), that would be $1,200 a year that you’ve contributed.

And if your company match is 25%–or 25 cents per dollar–they would put in an additional $300 per year.

That’s $300 of free money you get to keep.

Using another example, let’s say your company matched 100% up to 6% of your pay.

With the same $40,000 salary, you could put in 6% or $2,400 for the year, and the company would match this at 100%.

That’s $2,400 per year of free money that will help you grow your 401(k) account balance faster.

Just imagine how your 401(k) could grow over the next 10, 20, or 30 years if you consistently contributed the amount your company matched.

Save a Little More Each Pay Period

According to Fidelity® 2019 Retirement Analysis, in 2019, “employee savings rates hit record levels as nearly a third of investors increased savings rate in Q2. The average employee contribution rate climbed to a record-level 8.8% in Q2, nearly a full percentage point higher than ten years ago.”³

34% of women increased their savings rate, while millennials increased their savings rate 38%.

It may not feel like it, but saving a little bit now may make a big difference in your retirement lifestyle.

It doesn’t matter your age, how much you earn, or how close you are to retirement. Every little bit helps.

Even if you only save an extra $10, $15, or $50 consistently per pay period, it can make a difference in retirement because that money will grow over time.

What can you do to save 1% more each pay period? If you have to cut back on meals out or cancel a subscription service in order to save just a bit more, it will pay off in the long run.

#2 Quarterly Rebalancing

maximize your 401(k) savings

Contrary to what some investors believe, a 401(k) plan is not a “set it and forget it” program.

Much like driving cross-country, if there is a roadblock or other obstacle preventing you from reaching your destination, you need to make the appropriate changes in order to stay on course.

When it comes to maximizing your 401(k) savings, it’s not only important what you EARN in return, but it’s also important what you KEEP that may have a big impact on your future account value.

This is why we recommend 401(k) investors rebalance their account allocations every quarter, or four times a year.

Not rebalancing often results in more significant losses during bad markets and missed opportunities for growth during good markets.

Despite this, a staggering 80% of 401(k) investors fail to rebalance.⁴ And those who do often fail to manage risk through proper asset allocation.

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.

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

If you aren’t rebalancing your account allocations, you may not maximize your 401(k) savings. And you may be missing out on earning more and keeping more of your hard-earned retirement savings.

Have questions about your 401(k)? Reach out to us on our Facebook page, and we’ll answer you.

#3 Avoid Target Date Funds

maximize your 401(k) savings

While target date funds have become extremely popular with 401(k) participants in the past few years, it is essential that you diversify your account, and not rely solely on these financial vehicles.

While Target date funds (i.e., 2030, 2040, or 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 do not appropriately manage downside risk.

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

More and more experts claim target date funds don’t perform as well as average investors are led to believe.

Citing studies by institutional advisory firm Research Affiliates, Barron’s associate editor Randall W. Forsyth wrote in a February 2019 article, “They [the studies] show that the standard ‘glide path’ of target-date funds, which start heavily weighted in stocks and reallocate to bonds in later years, doesn’t produce the desired results.”⁵

According to Rob Arnott, chairman of the board of Research Affiliates, “You now have a trillion-dollar industry based on ideas that were never tested.”⁶

If you are currently in a target date fund, we suggest moving away from this option and better utilizing all the options available in your workplace retirement plan.

Click here to download our guide 5 Ways Target Date Funds Fail to Live Up to Their Promise.

#4 Get Independent Advice as Soon as Possible

maximize your 401(k) savings

If you want to maximize your 401(k) savings and really be prepared for retirement, we recommend reaching out for third-party advice.

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

In fact, a Morningstar report shows that participants that received expert guidance had as much as 40% more income during retirement versus those who received no help at all.⁷

And a May 2014 study conducted over a 6-year period compared those who had help with managing their 401(k)s and those who did not. The study revealed…

“On average, the median annual returns for participants in the study who got
Help were more than 3% ⁹ (332 basis points, net of fees) higher than people who
didn’t get Help.”⁸

Even though your 401(k) is employer-sponsored, it does not mean they are making changes on your behalf.

It’s your account. It’s your money. And it’s your future.

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

It’s never too late to take control of your financial future! Discover How to Supercharge Your 401(k) Performance Today and download our no-cost guide.