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401(k) Planning: What Do You Need To Know? Thumbnail

401(k) Planning: What Do You Need To Know?

By Scott Tschappat

We all know that hiding our money under our mattress or depositing it in a traditional savings account isn’t going to give us the growth we need to retire when we want, the way we want. In other words, we need a bit of help, something that gives us an edge. That’s what a 401(k) does. Employer-sponsored retirement plans give us a way to contribute to our future with a few added benefits thrown in. 

Unfortunately, many Americans are not taking advantage of these accounts, with 15% of those who have access to a 401(k) not participating. (1) And of those who are taking advantage of their 401(k), the average contribution rate is only 7.1%, and if you’re counting on it, that’s likely not enough to carry you through your retirement years. 

If you want to make the most of your 401(k), take a look at these 7 tried-and-true planning strategies. 

1. Contribute More

Okay, so this one seems self-explanatory, but it involves more than just choosing a random percentage of your pay to automatically go into your account or opting for the plan’s default contribution amount, (2) which is often not enough to give you a comfortable nest egg. Research shows that most plan participants do not change their default contribution amount (which is usually around 3%) (3) and that most workers need to increase their annual contributions by 5 to 10 percent above their current savings rate to meet their retirement goals. (4) For 2020, you can contribute $19,500 of your own money. Combined with your employer’s contributions, the maximum you can save in a year is $57,000.

To maximize your savings, cut back on expenses, channel a healthy percentage of any raises and bonuses directly to your 401(k), and automate savings increases of 1% of your paycheck every few months. It may not seem like you are making much of an impact, but every dollar helps. 

2. Catch Up If You Can

As you get closer to retirement, you may want to beef up your 401(k) to take full advantage of your final earning years, and thankfully, you can. If you are age 50 or older, you can contribute an additional $6,000 to your 401(k) account for a total of $26,000. If you add in employer contributions, that brings the maximum amount you can save to $63,500 in a year. The catch-up contribution is designed to help those closer to retirement age maximize their savings for retirement.

3. Get Your Full Match

Many employers offer a 401(k) savings match. By contributing to your company retirement plan, you aren’t leaving money on the table. If you aren’t able to contribute the full allowable amount to your employer-sponsored account, save enough to max out your employer’s 401(k) match. One in four Americans leaves money on the table by not maxing out their employer’s 401(k) match. (5)

Here’s an example of how this strategy can boost your retirement savings: If your employer offers $0.50 per $1 up to 6% of pay and your annual salary is $100,000, that’s $3,000 in free money for a total of $9,000 saved for the year. That amount adds up over time and can help you maximize your savings in a big way.

4. Beware Of Fees!

Along with upping your contributions to your 401(k), try to avoid high-cost funds, which can eat away at your savings. The higher the fees you pay, the longer it will take for your investments to grow. Many people don’t realize how much they’re paying in fees (6) (or assume they aren’t paying any), but retirement account expense deductions can range anywhere from 0.2%-5%, depending on the size of your company’s retirement plan. (7) It’s worth it to find out how much you are paying and see if there is an alternative that won’t cost you so much in the long run.

5. Invest For Growth

Your goal retirement date doesn’t have to dictate your investments’ time horizon. It depends on your individual circumstances. For example, you may be retiring in 10 years, but based on other resources, you may not need to set a 10-year horizon for your investments because you’ll only need a small portion of your nest egg in the early years. The rest of your money may stay invested for another 20 to 40 years. Invest with an appropriate perspective so you don’t end up cheating yourself out of years (or even decades) of growth.

6. Check In, But Not Too Often

Because of the many decisions that come with starting and managing your 401(k) account, many people employ a “set it and forget it” method, neglecting to review its progress and regularly rebalance. In a matter of a few years, those who neglect their 401(k) may realize that their account no longer reflects their risk tolerance, time horizon, and needs. Take the time to create a 401(k) strategy, check in with your account to rebalance, and increase your contribution rate as your financial situation allows. 

On the other hand, don’t let your emotions or media headlines cause you to make too many changes to your asset allocation. A 2018 DALBAR study revealed that investors’ decisions were the biggest reason for underperformance. (8) If you chase unrealistic returns in the hopes of cashing in big rewards or adjust your investments out of fear every time the market drops, you could prevent your portfolio from growing healthily with the right amount of risk. Create a long-term strategy and stay the course, no matter what the markets do. 

7.  Choose Between A Roth 401(k) Or A Traditional 401(k)

Your employer may give you the option to contribute to an after-tax Roth 401(k) or a pre-tax traditional 401(k). The money you contribute to a Roth will grow tax-sheltered and your qualified withdrawals are tax-free, but you don’t get a tax break on your paychecks. The account that is right for you will depend on your unique financial situation.

If you’re early in your career, you may benefit from investing in a Roth 401(k) because you’ll enjoy a number of years of tax-free growth. Additionally, if you anticipate being in a higher tax bracket when you reach retirement, a Roth 401(k) can make sense. You’ll be paying taxes up front based on your income now, rather than when you’re older, at a time when tax rates may potentially be higher. But if you anticipate your tax rate being lower when you retire than it is now, a traditional 401(k) could make more sense, as you’ll avoid having to pay taxes on your contributions now when your tax rate is higher. 

If the benefits of both options appeal to you, you can also contribute to both types of 401(k) accounts. Each year, as of 2020, you can contribute $19,500 to your 401(k), a Roth 401(k), or a combination of the two.

Get Your 401(k) On Track

Are you maximizing your 401(k)? It might be the case that your strategies need some adjusting or that minor changes could help you maximize your savings. There are a number of options for boosting your retirement savings and creating a rock-solid 401(k) strategy, but an experienced financial professional can help you make the most of your money and create a plan that is right for your unique situation. 

Let our team at Acute WealthCare help you create a retirement strategy that can get you where you want to go, when you want to get there. We can help you understand how your employee retirement plan works, how to optimize benefits, and coordinate your plans with your other retirement and investment strategies. Schedule a 15-minute introductory phone call to get started!

About Scott

Scott Tschappat is a wealth advisor at Acute WealthCare, an independent, fee-only comprehensive financial management firm with over 20 years of experience. Scott is committed to helping his healthcare worker clients create a financial plan that brings them peace, security, and dignity. Scott learned the importance of proper financial management and making a plan for the unexpected at a young age when his father passed away suddenly and he watched his mother use the life insurance money wisely to take care of their needs, both present and future. He strives to steward his clients’ money well, as if it were his own mother’s, and help them every step on the journey to their financial future. 

Scott lives in Highlands Ranch, CO, with his wife, Bridget, a school counselor at All Souls Catholic School, and their two daughters, Sarah and Emily. He loves sports and has been lucky enough to coach both of his daughters’ basketball teams. In the spring and summer, you can find Scott getting his hands dirty gardening and enjoying live music at Red Rocks or another local venue. To learn more about Scott, connect with him on LinkedIn.


(1) https://www.forusall.com/401k-blog/401k-statistics/

(2) https://www.nber.org/digest/apr02/w8651.html

(3) https://www.napa-net.org/news-info/daily-news/average-401k-savings-rates-hit-record-levels-balances-bounce-back

(4) https://www.investopedia.com/articles/retirement/082716/your-401k-whats-ideal-contribution.asp

(5) https://financialengines.com/education-center/employer_match_results/

(6) https://tickertape.tdameritrade.com/retirement/compare-401k-plan-fees-15627

(7) https://smartasset.com/retirement/what-are-401k-fees

(8) https://www.gurufocus.com/news/666966/the-average-investor-underperforms-what-you-can-do-to-avoid-this