5 Perks of Saving for Retirement in a 401(k)
Saving for retirement is essential, and a 401(k) plan can be an effective way to have a comfortable retirement.
Yet, according to a 2023 survey, 4 in 10 workers with a 401(k) don’t contribute.¹
If you are hesitant to set aside a bit or more of your paycheck for your retirement, consider these 5 perks of saving for retirement in a 401(k).
#1 You May Be Able to Reduce Taxable Income
Perhaps the biggest perk of saving for retirement in a 401(k) is that it helps reduce your taxable income.
You get a tax break for every dollar that you invest into your 401(k) with pre-tax dollars.
For example, if you earn $50,000 per year and put 3% of your pay into your 401(k), it equals $1,500 in savings.
This $1,500 drops your taxable income down to $48,500.
In some cases, your 401(k) contributions may even push you into a lower tax bracket, which could mean paying a lower tax rate.
[Related Read: 5 Crucial 401(k) Mistakes to Avoid in 2024]
#2 You May Be Able to Take Tax-Free Withdrawals
Should your plan have the Roth provision and you are able to contribute to it, you won’t get a tax break since contributions are made with after-tax dollars.
But you will be able to withdraw tax-free in retirement.
[Related Read: Should I Consider the Roth 401(k)?]
#3 You Can Earn Free Money
A big perk of saving for retirement in a 401(k) is that you can earn free money through a company match.
Typically, 401(k) company matches are 3% – 6% of the employee’s salary.
If you contribute the required percentage, you receive the same amount back into your retirement plan from your employer.
You earn more money toward your retirement just by contributing.
For example, if your company matches 100% up to 6% of your pay and you make $40,000 a year, you could put in $2,400 (or 6%) for the year, and you would get $2,400 of free money toward your retirement.
[Related Read: 3 Reasons to Get the Company Match in 2024]
#4 You May Be Able to Boost Savings without Contributing More
Another perk of saving for retirement in a 401(k) is that it may be possible to boost your retirement savings without increasing your contributions.
The key is to stay engaged with your 401(k) and rebalance it regularly.
Rebalancing your 401(k) is the process of realigning the weightings of your portfolio’s assets (or investments).
This means periodically buying or selling assets in your portfolio to maintain the initial desired level of asset allocation.
And it helps you stay within your risk level, protects against potential losses, and allows you to take advantage of growth opportunities during good markets.
If you aren’t rebalancing your account allocations, you may be missing out on earning more and keeping more of your hard-earned retirement savings.
[Related Read: What Every Investor Needs to Know about Rebalancing a 401(k)]
#5 You Can Make Catch-up Contributions
As you near retirement, you can save even more with catch-up contributions.
Employees with 401(k)s can contribute up to $23,000 for 2024.
However, those 50 and older can utilize catch-up contributions up to $7,500, for a total of $30,500 in 2024.
[Related Read: Retirement Plan Contribution Limits for 2024]
Professional Management May Help Grow Your 401(k) Balance
Professional 401(k) management help has been shown to increase 401(k) investors’ returns.
The Vanguard Fund Group published a 2019 study titled Advisor’s Alpha, which reported a 3% average increase in the value of portfolios of clients who work with a good financial advisor and have their accounts regularly rebalanced.²
To see how 3% may improve your 401(k) performance, check out our retirement calculator.
When you have professionals personally managing your 401(k), like we do at 401(k) Maneuver, the focus is on the outcome, not a cookie-cutter approach to investing based on your retirement date.
We believe there’s no such thing as a one-size-fits-all approach to saving for retirement.
Our goal is to increase your account performance over time, manage downside risk to minimize losses, and reduce fees that harm your account performance.
We are not robo advisors – we are real people making decisions on your behalf.
And, as a fiduciary, we’re obligated to act in your best interest with the goal to improve your account performance so you have more money during retirement.
See how 401(k) Maneuver works.
Book a complimentary 15-minute 401(k) Strategy Session with one of our advisors today.
SOURCES
- https://www.cnbc.com/2023/09/07/4-in-10-workers-with-a-401k-dont-contribute-to-plan-cnbc-survey.html
- https://www.investmentnews.com/industry-news/archive/financial-advisers-can-add-3-percentage-points-to-client-portfolios-vanguard-56122
