Americans have multiple tools at their disposal to save for retirement. 401(k) accounts could be the best of the bunch. These accounts allow both employees and employers to contribute. If managed well, 401(k) accounts can be an important source of retirement income.
What exactly is involved with managing a 401(k) account well? Several factors come into play. But there's one change, in particular, that could increase your 401(k) balance by thousands of dollars over time.
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Plenty of good ideas to grow your 401(k) account
Before we get to that major 401(k) change, let's look at other good ideas to grow your 401(k) account. Contributing early is one of the most important things you can do. The sooner you begin saving, the more time your money has to grow.
Another smart step is to contribute regularly by automatically withdrawing money from each paycheck. If you have to think about adding money to your 401(k) account each time, you might not take action.
Contributing more money will help, too. Even a relatively small incremental amount invested from every paycheck could add significantly to how much you have in your 401(k) account when you retire.
Don't be overly cautious with your investments, especially when you're younger. Some might be so afraid of losing money that they forego higher long-term returns. Stocks tend to outperform other assets over multiple decades, so it makes sense to have a higher weighting in stocks earlier in your career. Using target-date funds that automatically adjust your asset allocation over time can be a good move for many individuals.
Also, avoid early withdrawals if at all possible. Some 401(k) plans allow you to borrow money and repay it. Roth 401(k) plans allow you to withdraw the principal you've contributed without any penalties. The problem with this, though, is that money that isn't in your retirement account can't grow.
The one change that could make the biggest difference
While all of these are great steps to take, another change could make the biggest difference in growing your 401(k) account balance over time. It just might be the closest thing to a free lunch you'll see in investing: Maximize your 401(k) employer match.
According to a study conducted by the Plan Sponsor Council of America, a whopping 98% of employers offer 401(k) matching contributions. With these matches, employers contribute to an employee's 401(k) plan, up to a specified amount. The amount of the match varies, but many employers contribute between 4% and 6% of the employee's salary.
Let's assume you make $50,000 per year and your employer has a 5% match. If you contribute 4% of your salary to your 401(k) account, you'll save $2,000 per year. At a 10% rate of return, that could turn into nearly $974,000 over a 40-year career -- and that's assuming your salary doesn't change.
Now, though, suppose you bump your contribution up to 5%. Instead of saving $2,000 per year, you'll save $2,500. However, your employer will also match your contribution and kick in another $2,500. Over 40 years at the same 10% rate of return, the combination of your and your employer's contributions could grow to more than $2.4 million.
Many Americans are leaving money on the table
You'd think that everyone with a 401(k) plan would take full advantage of an employer match, considering how much additional money they could save for retirement. Unfortunately, that isn't the case.
Empower found that 25% of employees aren't contributing enough to their 401(k) accounts to maximize their employer matches. Many Americans are literally leaving money on the table -- potentially thousands (and maybe even hundreds of thousands) of dollars over time.
As mentioned, a 401(k) account is arguably the best retirement tool around. Maximizing your employer match will help ensure you use your 401(k) tool in a smart way that makes you more money.
