How to Master Your 401k in Your 30s

Once you reach your 30s, you likely have been in the workforce for a number of years, and are becoming well established in your career. Retirement is still 30-some years away, and might seem like an abstract concept. However, this is when you should ramp up your efforts and let time — your biggest ally at this age — work for you.

To be sure you’re saving enough and on track to maintain your standard of living in retirement, according to investment firm T. Rowe Price:

• At age 30, you should have 50 percent of your annual salary saved for retirement. For someone earning $80,000, this equals $40,000 in retirement savings.
• At age 35, you should have the equivalent of your annual salary saved for retirement. For someone earning $80,000, this means $80,000 in retirement savings.
• At age 40, you should have twice your annual salary saved for retirement. For someone earning $80,000, this equals $160,000 in retirement savings.

Although these are just benchmarks, they do serve as guidelines. Following these tips can help you master your 401k in your 30s.

Planning in your 30s for retirement is a difficult task, because no one — not even financial experts — knows how inflation, interest rates or market returns could impact your portfolio over the next few decades, said financial planner Jaycob Arbogast. But you can still create a plan based on what kind of lifestyle you hope to have in retirement.

“If you’d like to travel a lot, or you expect to have more medical costs than average, then you might need to have more saved up,” he said. “We want to find a target income that we can generate in retirement that will sustain you for the rest of your life.”

“A good rule of thumb is to save enough money to match 80 percent of your pre-retirement income,” said Arbogast. “For example, if you made $100,000 a year before you retired, then you’d want to live on $80,000 a year in retirement.”

Your 30s is the time to ramp up your savings and get serious about contributing to your 401k. “Contribute at least 15 to 25 percent of [your] gross income, and if you can, save the maximum allowed, which is currently $18,000 annually,” said financial advisor Sterling Raskie.

If it sounds challenging to set aside that much of your paycheck, remember that it will benefit you later. “The good news is by saving this much early on, you’ll get used to the remaining paycheck left over,” he said. “Additionally, you’ll be that much more ahead of the game approaching retirement.”

If you can’t manage to maximize your 401k and save $18,000 annually, be sure to take advantage of your employer’s matching contribution. “This is free money,” Raskie said. “Save as much as you can to get the full matching contribution.”

In addition to T. Rowe Price’s retirement savings benchmark mentioned earlier, the investment firm offered other guidelines to help you track your progress and adjust your savings as needed. “If you are 35 and have at least six times your salary in your 401k, you are well on track to maintaining your current lifestyle in retirement,” said financial planner Clint Haynes, referring to T. Rowe Price’s guidelines.

For those who have the equivalent to one year’s salary saved, “you will need to save 16 percent, including company match, annually until age 65,” said Haynes. If you have two times, three times, four times or five times your annual salary accumulated by age 35, “then you would need to save 12 percent, 8 percent, 5 percent and 1 percent, respectively, to maintain your current lifestyle. Everyone’s situation is different, but these can at least serve as a good parameter.”

Remember, the employer match is free money, so don’t pass it up. “It is very common for employers to offer an incentive for their employees to participate in their plan,” said Doug Guillory of Arista Financial Group. “Most use an employer matching formula.”

An example of a matching contribution might be for every 1 percent of compensation you contribute, your employer matches it 50 percent, up to a maximum of 6 percent, said Guillory.

If you make $40,000 per year and contribute 6 percent of your pay, and your employer contributes 3 percent — that’s $2,400 in employee contribution, with an employer match of $1,200. “That’s an incredible return on your investment before you even invest the money,” he added.

Even if you’re diligent about saving, fees and expenses can erode your nest egg. Investment fees in particular can really chip away at your savings.

“Invest in low-cost index funds and diversify among asset classes,” said Raskie. “One percent in expenses might not seem like much starting out, but over a 30-year career, that 1 percent adds up — for the mutual fund company.”

“If there are too many options to choose from, try to find a low-cost indexed target date fund,” he said. “This type of fund invests and allocates according to an assumed retirement date in the future. So the further you are from retirement, the more aggressive the allocation.”

You should watch your expenses at any age, but it’s especially important in your 30s. As you become more established, your overall expenses can easily increase, whether it’s from buying a house, having a family or simply trying to enjoy life. It’s important that you make saving for retirement a priority in your budget.

If you need cash, borrowing from your 401k should be a last resort, according to financial experts. “If the 401k is a pre-tax plan, you will end up paying double taxation,” said financial advisor David McCormick-Goodhart. “This is because the loan must be repaid with funds that you have paid taxes on. When you withdraw the funds in retirement, you will pay taxes again.”

When you do repay the 401k loan, you are paying the interest. However, the growth of your investments suffers since you own fewer shares of your mutual funds after you withdraw the funds, he added. Furthermore, if you leave your company before you repay the loan, it can become a taxable distribution, including penalties, if you don’t have the money to repay some or all of it.

Many 401ks have limited options, but that doesn’t mean you should choose a fund at random, said David Walters, financial advisor with Palisades Hudson Financial Group. “It is important to consider the difference between index and actively managed funds, as well as funds’ level of diversification and administration fees,” he said.

“You should also check in with your 401k on a regular basis,” he added. “Instead of giving in to the temptation to ‘set it and forget it,’ create a recurring calendar reminder to prompt you to regularly review your account and see if you’re on track for your retirement goals.”

Since you’re in your 30s, you likely still have a long time until retirement. At this time in your life, your asset allocation should be oriented toward growth.

“Although bonds play a part in a diversified portfolio, stocks should make up the lion’s share of a 401k for someone in their 30s,” said financial planner Jake Norton of Stewardship Financial. “Moreover, the fact that you are contributing every pay period means that you are taking advantage of dips in the stock market.”

Some employers offer access to financial advice or even account management through their 401k plan. This might be a good option for you if you’re not comfortable managing your account. “Financial professionals are there to help you, and if you aren’t sure about what you’re doing, they will be able to sit down and explain everything to you,” said Arbogast.

If you do want to consult a financial pro, Arbogast suggested seeking advice from a fiduciary. “A fiduciary is bound by law to only give you advice that fits your needs, and not advice that gives them the most pay,” he said. “Another good qualification is a financial professional who is ‘fee only.’ This means they are only paid by your fees to them, and are not paid through any kickbacks from the finance industry, and not paid on commission for selling you mutual funds. It’s one way of keeping that pro on your side.”

By the time you’re in your 30s, it’s likely that you’ve had a few different jobs. As you change jobs, it is important that you don’t ignore your old 401k plan. You have the option to roll the account into an IRA, leave it with your old employer unless it’s too small, roll it into you new employer’s 401k plan or take a distribution.

Taking a distribution at your age will not only incur income taxes, but a 10 percent penalty as well, making this an expensive choice. You might want to instead consider one of the other three choices. Don’t ignore your old 401ks, since even smaller accounts can add up over time as you try to accumulate a sufficient retirement nest egg.