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If you feel like you’re not doing enough to save for retirement, I promise you’re not alone. A lot of people struggle to save as much as they would like, and many feel they don’t understand their retirement accounts, including their 401(k)s, as well as they should. But familiarizing yourself with the account’s rules and limitations is key to getting the most out of it.
Here are three things you can do to optimize your 401(k) for success if you’re not doing them already. Hopefully, they’ll help you worry a little less about what the future holds.
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1. Automate your contributions
Setting up automatic 401(k) contributions is important because if you don’t, you won’t make any money with this account. 401(k)s generally only allow you to contribute funds by withholding money from your paychecks, so there’s no way to make one-time contributions when you have some extra cash.
Most 401(k)s these days give you access to an online account where you can view your balance and contribution rate and change this as necessary. But if you can’t figure this out, talk to your company’s HR department to learn how to make changes to your 401(k) contribution rate.
In a perfect world, you could set aside at least 15% of your savings, but this isn’t feasible for everyone. If you aren’t able to save that much, save as much as you can for now. If you get a raise in the future, you can increase your contributions then.
High earners need to stay mindful of the annual contribution limits so they don’t run into trouble with the IRS. You’re only allowed to set aside up to $22,500 in a 401(k) in 2023 if you’re under 50 years old or $30,000 if you’re 50 or older. Exceeding these limits will result in penalties for excess contributions.
2. Claim your 401(k) match whenever possible
If you can afford to claim your 401(k) match each year, this should be your top priority. Failing to claim your match means you forfeit your chance to earn that money, which could be hundreds or thousands of dollars, depending on your salary and your company’s matching formula. Reach out to your company’s HR department if you’re unsure how to claim the full match. Many companies give you either $1 or $0.50 for every $1 you contribute to the account, up to a certain percentage of your income.
Adjust your 401(k) contributions accordingly to make sure you earn the full match. You can do this by determining how much you still have to save to earn your match and dividing that by the number of pay periods left in the year.
3. Choose low-cost investments
Focusing on low-cost investments in your 401(k) can help you grow your wealth more quickly because you won’t lose as much in fees each year. Typically, 401(k)s give you a choice between a handful of investment options your employer has selected. You can usually review these options in your online 401(k) account if you have access to one.
Many of the investments you’ll come across are funds — bundles of investments — that charge expense ratios. These are annual fees you pay to the fund manager, and they’re charged as a percentage of your assets. For example, if you have $100 in a fund with a 1% expense ratio, you pay $1 per year to the fund manager.
If you can avoid it, you don’t want to exceed a 1% expense ratio. Check the prospectus for your current investments if you’re unsure what you’re paying now. And if you think it’s too high, see whether you can find a more affordable option to invest your money in.
If you don’t like any of the choices your employer gives you, your 401(k) may not be the best home for your savings. Stick with it until you claim your 401(k) match, if you’re eligible for one, and then put any additional retirement savings into an individual retirement account (IRA) or healthcare spending account (HSA). If you max those out, you can always return to your 401(k) until the end of the year.
These three steps can help you squeeze the most out of your 401(k), but you can’t just do them once. Schedule some time once per year to review your 401(k) contributions and investments and decide whether you need to make changes. It only takes a few minutes and can help you feel confident that you’re doing all you can to prepare for your future.
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