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Saving in a 401(k) plan is an essential step toward a financially stable retirement because Social Security probably won’t pay you nearly enough to manage all of your bills. Retiring without a nest egg of your own could set the stage for a world of financial stress.
But as the end of the year approaches, it’s important to give your 401(k) a little extra attention. Here are three essential moves to make before 2022 begins.
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1. Get as close as possible to maxing out
Right now, 401(k)s max out at $19,500 for savers under 50 and $26,000 for those 50 and over. (Next year, these limits will increase by $1,000.) If you haven’t yet maxed out your 401(k) for the year but doing so is a goal of yours, now’s the time to act.
When you save in an IRA, you can write out a check and fund your account quickly. But 401(k) contributions are deducted from your earnings, so if you want to ramp up your savings rate before the end of the year, that’s a change that will generally need to go through your payroll department.
In some cases, though, it can take a pay period or two for changes to your 401(k) election to go through. If you want to start having more money taken out of your paychecks, the time to inform your employer is now.
2. Make sure you’ve contributed enough to claim your full employer match
Because 401(k) plans have such high contribution limits, you may not be in a position to max yours out for the year. This especially holds true if you’re an average earner. It’s one thing to set aside $19,500 or $26,000 a year on a $120,000 salary, but if you’re earning a $60,000 salary, it’s a much harder ask.
Still, it definitely pays to contribute enough money to your 401(k) to be able to claim your full employer match — whatever it amounts to. If you need to increase your savings rate to make that happen, the time to act is, once again, now. If you give up part or all of your 401(k) match, you’ll effectively end up leaving free money on the table.
3. Assess your investment mix
Your 401(k) shouldn’t just sit in cash. Ideally, you’ll have your retirement plan invested in different funds. And now’s a good time to do a review of your investments and make sure they’re working for you.
One thing you’ll really want to look out for in your 401(k) is fees — namely, to make sure you’re not losing too much money to them. And if you are, you may want to shift more of your investments into index funds. Since index funds are passively managed, their fees, known as expense ratios, tend to be substantially lower than what you’ll pay to invest in an actively managed mutual fund.
To be clear, there’s technically no emergency when it comes to doing a review of your investments. But if you haven’t checked up on them in a while, then it pays to do it sooner rather than later.
The past year has been an interesting one, to say the least. Whether you’re sorry to see it end or not, it definitely pays to focus on these 401(k) moves before 2022 begins.
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