Financial resolutions are common, including saving more for retirement. For many people, a 401(k) is their main retirement savings vehicle, so it’s important to make sure to get the most out of it.
For those who want to make saving for retirement a priority in 2023 and beyond, see how you can increase your 401(k).
1. Get Out of Debt
Debt can be a major obstacle to meeting your financial goals and hitting 401(k) contribution limits. However, “getting out of debt frees up your largest wealth-building tool: your income,” said Chris Hogan, author of “Retire Inspired.” “When you’re out of debt and ready to invest, you’ll have a lot more money to put toward your retirement, and you won’t be looking over your shoulder at your creditors because you won’t have any.”
2. Build an Emergency Fund
If you don’t have the safety net of an emergency fund, you’re putting your financial future at risk. “If you have no emergency fund, but you do have a 401(k), guess what happens when a big emergency pops up?” Hogan said. “Your 401(k) becomes your emergency fund — and you’ll lose up to 40% of your money to taxes and penalties in the process. That’s a bad plan.”
3. Save a Little Every Day
There are opportunities to contribute more to your 401(k) every day if you look, said Stuart Robertson, CEO of ShareBuilder 401(k). “Think about ways to invest a portion of your everyday budget,” he said. “For example, buying a premium cup of coffee each weekday adds up to $650 a year, so putting away incremental amounts of money on a regular basis is a critical first step.”
4. Take Advantage of the Gift of Time
One of the most important elements of retirement planning is time. Even if you invest a small amount, getting started early is the key to success, said managing director Canon Hickman of wealth management company Equity Concepts.
“Let’s say you invest $100 a month starting at age 25, and retire at age 60,” he said. “Your account earning 7% would have grown to $165,884. But if you decided to wait until age 35, it would only have grown to $75,898. Even worse, if you waited until age 40 to start investing, you would have to save more than three times as much each month just to catch up by age 60. So get started early, and it’ll position you for success later on down the road.”
5. Take Advantage of Catch-Up Contributions
While it’s ideal to start saving early, it’s still important to save no matter when you start. Robertson said people 50 or older can use tax-advantaged options to help them invest more in their retirement accounts.
In 2023, investors who are 50 or older can contribute up to $30,000 in pre-tax personal catch-up contributions to a 401(k) — that’s $7,500 more than investors under 50 can contribute.
6. Work With a Trusted Professional
Perhaps one of the most important investment choices to make is finding a professional investment advisor. “A good financial advisor will help you choose the right options for your situation,” said Hogan.
“That phrase ‘help you choose’ is extremely important,” he added. “You never want to pay someone to make your decisions for you — that’s your responsibility. An investment advisor’s primary job is to teach you how things work and empower you to make your own decisions.”
7. Avoid Automatic Investing
You can use a computer system to manage your investments, which might sound easy, Hogan said. “But if you depend on a computer to manage your investing, you won’t give it a second thought, and that’s a bad idea,” he said. “You should use your computer to track your investment plan, but never use (it) to determine your plan.”
8. Get Your Full Employer Match
Many companies offer some form of a matching contribution, which is one of the biggest advantages of a 401(k), said Catherine Golladay, managing director at Schwab. So it’s important to make sure you save enough to get the full 401(k) match.
“For example, it might be a match of 50 cents for every dollar you contribute, up to 6% of your salary,” she said. “If your employer does offer a match, I strongly encourage you to contribute enough to take advantage of it in full, because the match is like an automatic return on your investment that you can’t get anywhere else. In fact, I always say this should be your No. 1 financial priority, even before paying down debt.”
9. Know the Matching and Vesting Schedules
Knowing your company’s matching and 401(k) vesting schedules can help you plan to better maximize your 401(k). “For example, at my company they match a 5% contribution 100% for three years; after three years their contribution vests,” said finance blogger Elizabeth Stapleton. “After three years, they will also increase their match of a 6% contribution with a 7% contribution (100% the first 5% and 200% the next 1%).”
10. Make Sure You Max It Out
Saving enough to get the employer match is the right first step, but maxing out your 401(k) can really boost your efforts to meet your retirement goals, said Golladay.
For people over 50, personal finance author Valerie Rind suggests another way to make sure you hit the maximum 401(k) contribution. “An easy way to do this is to contribute exactly $2,000 per month, instead of trying to calculate a percentage of your gross income,” she said.
11. Use Your 401(k) Plan Resources
“Many 401(k) plans offer some sort of help, such as investment advice or account management from a third-party financial professional,” said Golladay. “If this resource is available, commit to taking advantage of it.” Schwab Retirement Plan participants who used third-party, professional 401(k) advice were more likely to “increase their savings rate, were better diversified and stayed the course in their investing decisions,” she added.
12. Look At the Investment as a Whole
When it comes to picking good investments, past performance isn’t the only factor to consider, said accountant Michael Eckstein. “There are a lot of other factors involved in choosing a good investment, such as overall portfolio diversity, personal risk tolerance and fees.”
13. Rebalance Your Portfolio Periodically
It’s important to hold a diverse range of investments that align with your goals and risk tolerance, said Golladay. “January’s stock market volatility may have skewed your allocations, so this would be a good time to rebalance to ensure you have a mix of assets that are appropriate to your risk tolerance and investment strategy,” she said. Some plans offer auto-rebalancing at certain intervals, which might be worth considering, she added.
14. Consider Low-Cost Funds
Make sure you’re not paying too much in fees, as that reduces what you can save over time. Check to see if your plan offers lower-cost options.
“Increasingly, lower-cost investment products — like index mutual funds and exchange traded funds — are making their way onto 401(k) menus,” said Golladay. “By selecting these for your portfolio, you can put fewer dollars toward management fees and more into your account.”
15. Address 401(k)s From Previous Jobs
If you have any old 401(k)s from previous jobs, find out what you need to do to address them. “If you recently started a new job, you may very well have a 401(k) from your old employer,” said Golladay. “This would be a good time to explore your options, which include rolling it into an IRA, moving it to your new plan or leaving it alone. If you choose the last option, be sure your investment options reflect your current preferences.”
16. Take a 401(k) Loan Only as a Last Resort
When you’re strapped for cash, it might be tough to resist the urge to dip into your 401(k) for a loan. “Taking a 401(k) loan can significantly derail your long-term savings plan, and comes with plenty of financial penalties and potential tax consequences,” said Golladay. “Remember, this money is for your retirement, so leave it there until that day comes.”
17. Review Your Beneficiaries
When you’ve had a major life change — like the birth of a child, a marriage or a divorce — it’s time to review and update your 401(k) beneficiary designations so they’re in line with your current situation, said Golladay. “If you’re married, your spouse automatically gets the money, unless he or she waives that legal right,” she added.
18. Use a Retirement Calculator
This might sound like a simple step, but using the various retirement tools available to you can have a profound impact on the decisions you make. “One example of this is using a retirement calculator to track how savings habits will impact retirement readiness,” said Geno Cufone, senior vice president of retirement plan administration for Ascensus.
Nearly 18% of calculator users increased their contributions after use, and 37% of employees who weren’t saving started contributing after using a retirement calculator, according to Ascensus data.
19. Don’t Make Changes in a Down Market
When the markets take a dive, your first impulse might be to change your contributions. That can work against you, however.
“Participants should not be tempted to decrease their contribution percent when the market goes down,” said wealth advisor Robert Runnfeldt at David A. Noyes & Company. “By adding to their 401(k) every paycheck, participants end up with a below-average dollar cost average price. This takes place because, when the market is low, you buy more shares for investing the same amount of money.”
20. Sell a Concentrated Position
Consider diversifying your investments. This can also be a helpful strategy if you can’t afford to contribute the annual maximum to your 401(k), said personal finance writer Julie Rains. “Set up your 401(k) to max out your contributions. Sell your concentrated position, either a large portion annually or a couple of thousand dollars monthly,” she said.
“This sale generates the cash that allows you to have the funds needed to max out your 401(k) account,” she added. “Note that this path may not liquidate your concentrated holding as swiftly as you should, but offers a steady way to diversify.”
21. Don’t Overload on Company Stock
If you’re invested in company stock, be sure you’re still well diversified. “Check to make sure you aren’t overloaded on company stock, no matter how well it has performed,” said Golladay. “Typically, company stock should make up no more than 20% of your overall 401(k) portfolio.”
22. Keep Your Eye on Your Retirement Goals
If you’re having trouble getting motivated to save more, or to even start saving, remind yourself of the longer-range benefits and your retirement goals. “Consider this: Saving $10,000 a year for 30 years at a 7% growth rate would yield about $1,060,000 at retirement,” said investment advisor Betsy Vallone. “Remember, your money not only grows tax deferred, but there is a big tax savings in the year you contribute.”
23. Consider a Roth 401(k)
If your employer’s 401(k) plan has a Roth option, it’s worth looking into, said financial advisor Denise Halford Holder with David A. Noyes & Company. “Since a majority of 401(k) assets are pretax, many (people) do not realize that the distributions from this lifelong savings vehicle are fully taxable in retirement.”
“For example, if you have $200,000, and are in a 25% tax bracket, you actually only have $150,000,” she said. “However, if this money were in a Roth 401(k), you would have the entire $200,000, since the contribution was taxed initially. This option tends to be very beneficial to younger workers. One should consult a financial advisor to investigate this option.”
24. Auto-Increase Your Contribution
Many plans offer an auto-increase feature to help participants reach their 401(k) contribution limits, said financial advisor Daniel Zajac. Enrolling should be relatively easy.
“Simply log into your account and check that box (that) enrolls you in the program,” he said. “Once enrolled, your annual deferral should increase each year without you doing anything. For example, if you are currently contributing 5%, the following year your deferral will increase to 6%. Do this for a few years and your savings percentage could double in no time.”
25. Carefully Consider Target Date Funds
Target date funds are big business for the mutual fund companies offering them. They also represent a “safe harbor” from liability for your employer if they’re used as the plan’s Qualified Default Investment Alternative. This doesn’t mean they’re a bad option, but you should do your research to make sure they’re the best option for you.
For younger investors or those who don’t have investments outside of the plan, a target date fund offers an instant diversified portfolio. Before you decide, make sure you understand how the fund invests your money, the glide path into retirement, the fund’s expenses and the level of risk. Also, don’t always assume that the fund with the target date closest to your anticipated retirement date is the right one for your situation.
26. Get the Most Out of Raises and Bonuses
One way to save more money is to take action when you’re making more money. “Don’t forget to increase your savings when your salary grows,” said Andrew Meadows, senior vice president of brand and culture at Ubiquity Retirement + Savings. “That big bonus you’ve been waiting on — bonuses are subject to 401(k) contributions.”
Put in more money whenever you can, he said. And when you change jobs, your new job might have even better benefits, so it’s a great time to reach the maximum 401(k) contribution if your new job pays you more money.
27. Ask Your Employer for More Options
If your plan is lacking in 401(k) options that work well for you, you might be able to change that. “One little-known way to maximize your 401(k)… is to ask the person at your company who is in charge of the 401(k) plan to add more options to the plan,” said Kirk Chisholm, a financial advisor at Innovative Advisory Group.
“Many plans offer between five and 25 mutual funds options, but 401(k) plans are not limited to mutual funds,” he said. “Some plans allow you to self-direct your 401(k) account into a lot of mutual funds, or even individual stocks, bonds, ETFs and other traded securities.”
The bottom line: It can’t hurt to ask your company to add more options, he said. After all, this can be a win for everyone, since companies tend to offer 401(k) plans to make their employees happy.
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