Maximizing Your 401(k)

There has been a great deal written about the retirement opportunities provided by an informed and intelligent approach to your 401(k).  However, given the importance of effectively managing your 401(k), a fresh look can’t hurt.

A recent article in USA TODAY presented 7 useful steps towards making the most of your 401(k), as summarized below.

Save more than 6%

A little more savings now, can bear significant dividends in the long run, due to compounding.

Avoid loans and distributions

401(k) loans cost extra in taxes and fees and are likely to reduce the benefits of good investment returns.

Seek advice

According to Bankrate, 26 percent of Americans get retirement advice from an investment professional.  About the same number seek advice from other sources.  Yet 46 percent didn’t seek any advice.

Max out contributions

Last year, only 13 percent of Vanguard’s retirement plan participants maxed out their 401(k) contributions.  Saving in any form is hard, particularly for lower-income workers, but the long term benefits are compelling.

Use a retirement calculator

Mapping your financial future can be daunting and is inherently largely made up of guesses.  Calculators aren’t flawless, but going through the exercise can be very helpful in highlighting what it will take to reach your objectives.

Make the most of employer match

Many employers partially match their employees’ retirement contributions, but not all employees take advantage of this benefit.  This is probably the most valuable boost to your retirement, constituting essentially free money.

Complete a financial plan

A clear strategy is key to reaching your goals.

An intelligent and informed approach to retirement planning is a good idea regardless of age.  However, due to the importance of compounding, younger people, looking at workforce participation measured in decades, would be particularly well served by adopting a personal financial strategy that contemplates saving early and often.

All comments and suggestions are welcome.

Walter J. Kirchberger, CFA