By Donald Albach
Planning for retirement can be a daunting task, but taking control of your 401(k) is an important step toward experiencing financial freedom in your golden years. In this article, we’ll explore some key steps you can take both before and during retirement to maximize your 401(k) savings and feel confident in your financial future.
Maximize Your Contributions
One way to take control of your 401(k) is to contribute as much as you can afford, up to the IRS maximum limit. For 2023, that limit is $22,500 for individuals under age 50 and $30,000 for individuals age 50 and older. Contributing the maximum amount not only helps you save more for retirement, but it also helps reduce your taxable income.
If you can’t afford to maximize your contribution, then contribute at least enough to take full advantage of the employer match. Many companies offer employer matching contributions and the most common matching formula is 50% of employee contributions up to 6% of salary. This means that if you earn $75,000 and contribute 6% of your salary to the plan, your employer will match half of your contribution. That’s an extra $2,250 you didn’t have to contribute yourself—it’s essentially free money! Each employer will have different requirements for their matching contributions, so be sure to check with your plan advisor before making decisions about your contributions.
If you’re unable to contribute at least enough to take advantage of the full employer match to maximize savings, consider increasing your contribution percentage over time to reach the maximum contribution limit.
Take Advantage of Roth 401(k) Contributions
Another important point to consider when taking control of your 401(k) is to utilize the Roth 401(k) election if your plan allows it.
Unlike a traditional 401(k), where you contribute pre-tax dollars, a Roth 401(k) allows you to contribute after-tax dollars. While you won’t get an immediate tax break in the year you contribute, your withdrawals in retirement will be tax-free. This can be particularly beneficial if you expect your tax rate to be higher in retirement than it is now. It’s also beneficial for high-earners who may not be eligible to contribute to a Roth IRA. Starting in 2024, Roth 401(k)s will no longer be subject to required minimum distributions, which makes them an attractive vehicle for passing tax-free wealth to the next generation.
Keep in mind that not all employers offer a Roth 401(k) option, and even if they do, there may be restrictions on who can contribute. It’s important to review your plan documents and consult with a financial advisor to determine if a Roth 401(k) is the right choice for you. If it is, make sure to take advantage of this option to maximize your retirement savings and minimize your retirement tax liability.
Understand Your Investment Risk
It’s not uncommon for people to choose an investment in their 401(k) and then put the account on the back burner until just before retirement. This is a mistake that should be avoided as much as possible. Understanding and proactively monitoring the risk level of the investments within your 401(k) plan is a key component of retirement success.
The risk level can vary widely depending on the type of investment you choose. For example, target-date funds, which are designed to become more conservative as you approach retirement, may have more or less risk than you think depending on the fund’s specific allocation. Investors who invest in multiple funds, or don’t periodically rebalance their portfolios, may also end up with more risk than they intended.
Be sure to review your plan’s investment options regularly and understand the level of risk you’re taking. Each investment should align with your retirement goals and risk tolerance. Working with a financial advisor is a great way to determine the best investment strategy for your needs.
Keep Track of Your Withdrawal Privileges
There’s a lot that goes into a 401(k) plan, and many employees don’t know exactly to which privileges they are entitled. Understanding your withdrawal privileges is another crucial aspect of taking control of your 401(k) before and during retirement.
For example, some plans may offer in-service withdrawals at age 59½, which means you are allowed to withdraw your funds while still working. This is a beneficial rule if you need the funds for an emergency, or if you would like to invest them elsewhere. There are limits on the types of investments available within a 401(k), using an in-service withdrawal to move your funds to the guidance of a qualified financial professional can be an effective way to improve your returns over time.
It’s important to review your plan documents and understand your withdrawal privileges. Some plans may have restrictions on when and how you can withdraw funds, and penalties may apply if you withdraw funds before age 59½. Understanding your withdrawal privileges allows you to make informed decisions about your retirement savings and avoid penalties or fees.
How We Can Help
At Millstone Financial Group, we help pre-retirees and retirees optimize their retirement planning and pursue financial independence. If you have questions about your 401(k), or you would like to discuss your overall retirement plan, schedule a complimentary consultation by calling (732) 385-8544 or emailing [email protected]. You can also click this link to request a free copy of our second opinion guide today!
About Don
Donald Albach is President and Co-Founder of Millstone Financial Group, an independent financial advisory firm helping pre-retirees and retirees pursue their retirement goals. Don has over 26 years of experience in the financial industry and focuses on retirement planning, designing retirement income planning strategies to guide his clients toward financial independence. Don graduated from Norwich University, the nation’s oldest private military college, and has worked his entire career in the financial services industry, including First Boston, MetLife, and C&A Financial Group. He co-founded Millstone Financial Group in 2012 with Michael Russo. Don and Mike met each other while working at MetLife, and in 2003 both he and Mike were recruited to work at C&A Financial Group, where they spent the next 10 years. It was at C&A Financial Group where they decided they needed to start their own company that strictly focused on retirement income planning. They both had a desire to help people navigate the complexities of retirement and created Millstone Financial to do just that. Don currently lives in Monroe Township, NJ, with his wife, Tina, to whom he has been married since 1992. They have three children together: Paige, Donny, and Ally. Don’s two passions are sailing and watching college football, and he also enjoys cooking Sunday dinner for his family. To learn more about Don, connect with him on LinkedIn.
Advisory services are offered through Millstone Financial Group Limited Liability Company, a Registered Investment Advisor in the State of New Jersey. Insurance products and services are offered through Millstone Financial Group Limited Liability Company. Millstone Financial Group Limited Liability Company is not affiliated with or endorsed by the Social Security Administration or any government agency.
All material discussed is for informational purposes only. Opinions expressed are solely those of Millstone Financial Group Limited Liability Company and staff. All topics covered are believed to be from reliable sources; however, Millstone Financial Group Limited Liability Company makes no representations as to its accuracy or completeness. Investing involves risk including the loss of principle.
This article shall in no way be construed as a solicitation to sell securities or investment advisory services to residents of any state other than New Jersey, or where otherwise permitted. All information and ideas should be discussed in detail with your individual adviser prior to implementation.
This material is intended to provide general financial education and is not written or intended as tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel.
