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How to Take Full Advantage of Your 401(k)

You don't have to be one of many Americans delaying retirement if you participate in a 401(k) plan.

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Your 401(k) could ensure you become retirement-ready when the time comes.

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With all the doom-and-gloom reports of workers having to delay retirement, it’s important to highlight good news when it comes. People who participate in a 401(k) plan have a good shot at being able to pay for retirement, according to "The Role of Social Security, Defined Benefits and Private Retirement Accounts in the Face of the Retirement Crisis," authored by Jack VanDerhei, Ph.D. of the Employee Benefit Research Institute. Check it out:


“Assuming current Social Security benefits are not reduced, between 83 and 86 percent of workers with more than 30 years of eligibility in a voluntary enrollment 401(k) plan are simulated to have sufficient 401(k) accumulations that, combined with Social Security retirement benefits, will be able to replace at least 60 percent of their age-64 wages and salary on an inflation-adjusted basis.”


Further, the study claims that a large portion of today’s workforce is better prepared for retirement than in 2003, despite the 2008 financial crisis.

The study might give us reason to believe that we’re pointed in the right direction, but you still have work to do, whether or not you have 30 years remaining until retirement. So before you pat yourself on the back for a job well done – or think the study means you can set your 401(k) plan on autopilot and coast to retirement – seize this opportunity to take full advantage of your retirement savings efforts. Here are five things you can do to optimize your existing endeavors:

1. Remove Social Security benefits from your retirement needs calculations. Social Security benefits are provided by the federal government, and the solvency of the program is in question. Most acknowledge the issues of Social Security, but clear action to address those issues is lacking so far. We’re left with a situation in which it’s difficult to predict your future Social Security benefits. The most practical thing you can do is hope for the best, but plan for the worst. In this case, it means disregarding Social Security benefits when determining your retirement savings goal. Consider any future benefits you may receive as icing on the cake.

2. Save as much as you can for as long as you can. A major assumption of the EBRI study is that people who can participate in an employer-provided retirement plan will participate. So whether you’re 22 or 52, rich or poor, employed at your dream job or just working to get by, start participating in your 401(k) plan the moment you’re eligible.

Are you only able to afford a small contribution each month? Do you worry it’s not enough to make a difference? Think again. Thanks to the power of compounding, a small contribution today can grow to a significant amount of money over time, because the earnings themselves have the potential to earn a return year after year.

If you’re already contributing to a 401(k), make a plan for increasing your contribution amount on an incremental basis. Start with 1 percent annual increases (up to the current Internal Revenue Service limit of $17,500 per year, with an additional $5,500 if you’re age 50 or over), which would translate to an additional $41.67 per month in pretax income for someone earning $50,000 annually. It won’t make a huge dent in your take-home pay, but trust me when I say you’ll feel the difference once you retire.

3. Refrain from taking 401(k) loans or distributions. You might think that taking just one 401(k) loan couldn’t possibly hurt your nest egg, but you’d be wrong. With “just” one $20,000 loan at an interest rate of 5 percent, even paying the loan back on time means you could lose $16,649 in potential returns. The damage gets worse if, like more than 66 percent of 401(k) investors who leave their employers, according to a 2013 study by New York Life Retirement Services, you fail to pay back the loan and instead take a distribution on the amount. Your potential loss could rise to $399,204, plus you’ll be subject to income taxes and (if under age 59 1/2) a 10 percent early withdrawal penalty.

Your 401(k) account isn’t meant to be a piggy bank you can tap into whenever you like. Forget about 401(k) loans and develop a strategy to help you make ends meet or afford large purchases without jeopardizing your financial future.

4. Take full advantage of your company match, if offered. Check with your human resources department to find out if your employer offers matching 401(k) contributions, and if so, make sure you’re contributing enough to take full advantage of the match. If you don’t, you’re leaving “free” money on the table.

 5. Be a conscientious 401(k) investor. Many 401(k) plans offer professional investment help, so jump at this guidance if it’s available to you. If you decide to go it alone, though, stay on track with these tips: 

  • Avoid single-stock investments in favor of mutual funds, which are preferable because of their diversification, convenience and professional management. Also, avoid becoming over-concentrated in one fund. A good rule of thumb is to invest no more than 15 percent of your 401(k) assets in any single fund.
  • Whenever possible, seek out high-quality funds. “Quality” means a fund has steady management that sticks to the fund’s stated goals, is well-rated by Morningstar and/or a similar organization, and has performed consistently over a long period of time. In addition, take your risk tolerance into account as you allocate your investments.
  • Finally, remember that the standard rules for investing still apply: review and rebalance quarterly, revisit your investment choices annually and make sure your personal situation and goals – not market movements – drive any changes you might make to your 401(k).

A hands-off approach to 401(k) investing won’t give you the best chance at paying for retirement. You’re in the driver’s seat; you have the power to ensure you’ve accumulated a nest egg that will provide for a comfortable lifestyle in your post-working years. Take advantage of your options and be an engaged participant, and you’ll be well on your way toward achieving your retirement goals.