If you have a 401(k), you can build a comfortable retirement. The trick is knowing how to get maximum value from that workplace account.
Fortunately, you're in the right place. Here are five strategies you can use to squeeze every penny out of your 401(k).
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1. Earn your match
If your employer offers matching contributions, contribute enough from your own paycheck to get your full match. To figure out how much that is, reference these two rules from your plan's matching program:
- How much your employer will contribute for every $1 you contribute. Fifty cents for every $1 is common, but more generous employers will contribute dollar-for-dollar.
- The cap on matching contributions, usually expressed as a percentage of your salary. A 3% to 5% cap is common.
Say your employer matches $0.50 for every $1 up to 4%. That means you'd contribute 8% to get the maximum 4% from your employer. If your employer matches $1 for every $1 up to 4%, you'd contribute 4% to get your full match.
2. Keep your match
it's important to remember than 3% of your salary adds up over the course of your career. If you make $52,000 a year, for example, 3% is $1,560 annually. Invest that amount at 7% annual growth for 30 years, and it builds to nearly $150,000.
Of course, you'll only see that $150,000 at retirement if you keep your match. That means not leaving your employer until you are 100% vested. Switching to a new job with a different company before you are fully vested requires you to forfeit part of those matching contributions.
Ask your benefits administrator about your plan's vesting schedule. It might require you to stay with your company for four or five years. Commit to that timeline unless there's a compelling reason for you to accept another opportunity.
3. Invest all of it
A common 401(k) mistake is not setting your investment selections. If you don't actively pick your investments, your contributions either remain in cash or are invested in a default fund. Default funds have more growth potential than cash, but they may not suit your needs or retirement timeline.
Most 401(k)s offer two general investment approaches:
- Invest 100% of your contributions into a target date fund (TDF) that aligns with your expected retirement date. TDFs are diversified for you, across and within asset types.
- Or invest in few different funds to create your own diversified portfolio. You might start with an S&P 500 index fund, for example. You could combine that with smaller positions in fixed income, small- and mid-caps, and international equities.
4. Choose low-fee funds
Mutual funds and exchange-traded funds (ETFs) pass their administrative fees along to shareholders. Fund fees reduce your net investment returns.
Choosing lower-fee funds keeps more of your money invested and working for you. To do that, compare the expense ratios of the fund options in your 401(k). Where you have a choice between two similar funds, lean toward the one with the lower ratio.
A low expense ratio for a 401(k) fund is 0.5% or less. Some index ETFs charge as little as 0.02%. That ratio translates to $2 in expenses for every $10,000 you have invested.
If your 401(k) doesn't offer any low-fee funds, talk to your benefits administrator. The investment menu won't change on your complaint alone, but other participants may be asking for cheaper funds, too.
5. Tread lightly with extra services
Most 401(k)s charge for optional services, like hardship withdrawals, 401(k) loans, and the ability to invest outside of the 401(k) fund menu, called a brokerage window.
There are times when you need these extra services, but venture into them cautiously. A 401(k) loan, for example, can upend your retirement plan -- and charge you origination and loan fees in the process. A brokerage window can overcome the limitations of a subpar fund menu. But it can also lure you into investing too aggressively. And again, you'll absorb a fee for the privilege.
Don't overlook fees, especially when they're optional. Fees reduce your invested 401(k) balance, and that can get very expensive over time.
Maximizing your 401(k) wealth
To get the full value of your 401(k), make sure you earn and keep your employer match, stay invested, and manage your fees carefully. Those five strategies combined can add $100,000 or more to your account balance over time.
