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6 Ways to Squeeze Every Last Penny Out of Your 401(k)

By Catherine Brock - May 31, 2021 at 5:48AM

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When it comes to long-term investing, pennies matter.

Ready to get serious about retirement saving? If you have a 401(k), you have access to everything you need to retire wealthy. Use these six 401(k) power strategies to squeeze every last penny from your work-sponsored retirement account.

1. Max your employer match

Employer matching contributions are free money, and they expedite the growth of your retirement savings. Even if your matching rules are stingy, the money still adds up over time. Say your match tops out at $125 monthly. That monthly contribution in an account earning 7% annually will grow to $20,000 in 10 years; $60,000 in 20 years; and $140,000 in 30 years. And those numbers don't count the raises you'll get along the way.

Don't leave money on the table. Contribute whatever amount is required to max out your employer match.

Young person dancing outside at the park.

Image source: Getty Images.

2. Don't quit or slack off

Earning those matching contributions is half the battle. The next challenge is keeping them. It's likely your 401(k) plan has a vesting schedule, which defines the timeline for you to take ownership of matching contributions. Vesting schedules vary, but it often takes three to five years to be 100% vested. Leave earlier and your employer will deduct a portion of the matching contributions from your account.

Your separation from your employer doesn't have to be voluntary, either. You also lose unvested contributions if you get fired or laid off. Stick with your job, and don't give anyone a reason to fire you.

3. Keep your hands out of the cookie jar

Early withdrawals and 401(k) loans share an obvious problem. Both transactions reduce your invested balance, causing you to miss out on future earnings. It's very difficult to recover from that, even if you can repay the funds quickly.

Plus, your 401(k) will probably charge you extra fees for these services. You might pay a loan origination fee or withdrawal fee of $100, for example. That may seem minor in the moment. But we are talking about squeezing pennies from your 401(k) -- and $100 is 10,000 pennies that should stay in your account.

Find another way to manage through financial emergencies. Just say no to 401(k) loans and withdrawals.

4. Choose low-fee funds

All mutual funds charge operating expenses to shareholders. These are disclosed as the fund's expense ratio, which is the percentage of your investment that covers fees. An expense ratio of 0.05% equates to $5 in fees annually for every $10,000 invested. An expense ratio of 0.50% equates to $50 for every $10,000 invested.

Say you have your choice of two similar funds, both growing at 7% annually on average. One has an expense ratio of 0.05% and the other has an expense ratio of 0.5%. Invest $500 monthly and the lower-fee fund will grow to about $390,000 in 25 years. The other fund will only reach $365,000. That's a $25,000 difference.

Pay attention to the expense ratios of the funds in your 401(k). Choosing funds with lower fees can improve your returns, which means faster growth of your balance over time.

5. Increase your contribution rate at bonus time

If you get an annual or quarterly bonus, consider increasing your contribution rate for those payouts. Assuming your regular paycheck covers your living expenses, you shouldn't need every last dollar of that bonus. Diverting a chunk of it into your 401(k) is an easy way to achieve savings momentum without feeling the sting in your monthly budget.

Check with your benefits administrator on how to implement this strategy. Many plans allow you to set different contribution rates for regular pay versus bonuses. If you don't have that option, you may have to increase the rate temporarily and then lower it after your bonus is paid.

6. Increase your contribution rate with every raise

You can also increase your contribution rate with every raise. Again, if you can pay your bills pre-raise, a slightly higher contribution post-raise should be a seamless adjustment -- one that adds thousands to your account balance over time.

Pennies matter

Your 401(k) is a long-term investment account. Small amounts of money here and there do add up when the timeline is 20 years or more. Use that to your advantage. Earn and keep every dime of your matching contributions, choose lower fees, and take every opportunity to increase your own contributions.

These 401(k) power strategies fire up your wealth momentum and get you closer to the easygoing retirement lifestyle you want.

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