3 Ways to Get More Out of Your 401(k)

May 31, 2021

The more money you manage to save for retirement, the more financial flexibility you'll buy yourself as a senior. Not only that, but you'll need savings to compensate for the fact that while Social Security will pay you something, your monthly benefit may not come close to helping you cover your living expenses in full.

If you have access to a 401(k) plan through your employer, you may be motivated to save in it. Not only do 401(k)s offer generous contribution limits, but funding these plans is easy -- just sign up with your payroll department to have contributions deducted from your earnings automatically. And if you want to make the most of your 401(k), be sure to do these key things.

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1. Contribute enough money to snag your full employer match

Many employers that offer 401(k)s also offer some type of matching program. Your company might, for example, match 100% of your contributions up to a certain dollar amount or percentage of your salary. It pays to put enough money into your 401(k) to claim that match in full, since it's effectively free money.

In fact, say you end up staying at your company for 30 years, and each year, you snag your full 401(k) match, which happens to be $3,000. If your 401(k) investments deliver an 8% average annual return, which is more than possible with the right strategy, then after three decades, you'll end up with about $340,000 just from those matching dollars alone.

2. Research your investment choices rather than stick with your plan's default fund

When you save in a 401(k), you get the option to invest your money in different funds. It pays to explore the fund choices your plan comes with rather than stick to its default investment option, as doing so could score you higher returns and also save you money on fees.

Most 401(k) plans revert to a target date fund by default. With one of these funds, your money is invested more aggressively when retirement is decades away, but you're gradually shifted toward safer investments as retirement nears.

Target funds are an easy, convenient way to invest, but often, they err on the side of being conservative, which means if you stick to one, you could end up losing out on higher returns. Also, target date funds tend to charge high fees. On the other hand, if you invest your 401(k) in stock-focused index funds, your fees will be substantially lower -- and you could end up with better returns in the process.

3. Consider a Roth account

Many 401(k) plans these days come with a Roth savings option. If you decide to go with a Roth 401(k), you won't get an immediate tax break on your contributions. What you will get, however, is access to tax-free withdrawals from that plan once you enter retirement. With a traditional 401(k), you won't get to keep your retirement distributions in full, because the IRS will take a chunk of them. That could, in turn, leave you with less financial wiggle room as a senior.

Your 401(k) could be your ticket to a fulfilling, worry-free lifestyle during your senior years. Do what you can to maximize yours for the retirement of your dreams.