Stashing money in a 401(k) regularly already puts you ahead of the curve. One in three Americans have less than $5,000 saved for retirement and one in five have nothing at all, according to Northwestern Mutual. But for the best shot at a comfortable retirement, you have to do more than just make 401(k) contributions. Here are three 401(k) moves you should make right now to maximize your savings.
1. Take advantage of any employer match.
Employer-matched 401(k) funds relieve some of the burden of saving for retirement, and you shouldn't pass them up if they're offered to you. Unless you need all your money to cover basic living expenses, set aside at least enough to get your full employer match. Ask your employer what that is if you're not sure.
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This alone may not give you enough savings to help you hit your target retirement goal. Figure out how much you should be saving each month by estimating your annual retirement living expenses. Multiply this by the number of years of your planned retirement and add 3% annually for inflation. A retirement calculator can do this for you, and it should also ask about investment rate of return. Using 5% to 6% is a conservative way to come up with estimates, although your investments may grow faster than this. Your calculator should tell you how much you need to save overall and per month to achieve your goal. Subtract any employer-matched funds to figure out what you need to save on your own.
Try to boost your 401(k) contributions to this level if possible. If not, contribute as much as you can right now and try to increase your contributions by 1% of your salary per year until you reach your target amount.
2. Understand your 401(k)'s vesting schedule.
If your employer offers a 401(k) match, it probably also has a vesting schedule. This determines when employer-matched funds are yours to keep. If you leave the company before you're fully vested in the plan, you may forfeit some or all of your employer match.
Companies take different approaches to vesting schedules. Some offer immediate vesting. Others require you to work for the company for a certain number of months or years before you're vested. And still others have graded vesting schedules where, for example, you get to keep 25% of your employer-matched funds after one year, 50% after two years, and so on.
Talk with your company's HR department if you're unsure how the vesting schedule works at your company. It probably won't be an issue if you plan to work for the company for the foreseeable future, but if you're thinking about switching employers, it may be in your best interest to stick it out a little longer until you're fully vested so you can take all your employer-matched funds with you when you go.
3. Take steps to minimize your 401(k) fees.
Yes, your 401(k) charges fees, whether you're aware of it or not. They're often taken directly from your account as a percentage of your 401(k) assets each year, and over time, they eat into your investment gains. Some of these fees cover administrative tasks, like recordkeeping, while others may be directly related to the investments you choose. Smaller companies usually have more expensive 401(k)s than larger ones, in part because they have fewer employees and in part because they're less able to bear the administrative costs themselves.
Check the prospectus for your investments and your 401(k) plan summary for details on how much you're paying in fees. You could also ask your plan administrator or your company's HR department if you're not sure where to find this information.
Ideally, you don't want to pay more than 1% of your assets annually. That might not sound like much, but it costs $10,000 on a $1 million portfolio. Talk with your employer about offering more low-cost investment options, like index funds -- mutual funds that passively track a market index -- if you're paying more than 1% of your assets in fees each year. If the company refuses, consider moving your money out of your 401(k) and into an IRA instead. You'll have more investments to choose from and the fees are typically lower.
Consider sticking around if your employer 401(k) match covers your fees, though. You're allowed to contribute up to $19,000 to a 401(k) in 2019 or $25,000 if you're 50 or older, while you can only contribute $6,000 or $7,000, respectively, to an IRA. These higher contribution limits are a bonus if you plan to stash away a lot of money for retirement this year or if you got a late start on retirement saving and need to catch up.
If you haven't taken any of the three steps mentioned above, now's a great time to do so. They won't take long, but they can make a significant difference in your 401(k) balance when you're ready to retire.
