Getting The Most Out Of Your 401(k)

(Last updated on May 16, 2022.)

What will your life be like in twenty years? Ten Years? Next year? How far are you from retirement? Do you feel comfortable with your existing retirement planning strategy? Do you have a 401(k)? When was the last time you looked at it?

These are all important questions but, for many, are often overlooked. We tend to see retirement as something far off in the future, something that there’s plenty of time to prepare for — not at all like those pair of pants in the back of the closet that have always been just a little too snug. This year, why not make room on your to-do list for your 401(k) plan as well?

Like any goal you set out to achieve, getting the most out of your 401(k) plan requires a strategy. So how can you make your savings strategy work for you?

1. Tax Breaks

With the new maximum contribution amount increasing to $20,500 from last year’s max of $19,500, there’s an extra $1,000 you can put to good use for your future. By managing to put this extra money away (an extra $83.30 a month), your gross income will be lower this year.

2. Catching Up

Are you behind on your contributions? While things might seem scary, you do have options. For workers aged 50 and over, you are eligible to put away an additional $6,500 a year, bringing your annual maximum to $27,000.

3. Avoid Costly Penalties

This one may seem obvious but it’s still important to note.

For example, withdrawing money from your 401(k) early could result in a 10 percent penalty. However, withdrawing your contribution money too late could trigger a 50 percent penalty if you choose to not take out the minimum distribution amount six months after your 70th birthday.

4. Get a 401(k) Match

For workers under the age of 50, you’ll need to be able to contribute $1,708 a month to max out your yearly contribution limit (or $2,250 per month for those over the age of 50). While that may be possible for some, it’s certainly not the case for everyone.

If contributing the maximum annual limit to your 401(k) isn’t possible, ask your employer if they offer a match amount. If they do, not taking full advantage of it would be the same as turning down free money.

5. Consider a Roth 401(k) Option

While traditional 401(k) plans allow you to defer paying taxes on your retirement savings, many employers offer a Roth 401(k) option as well – which would enable you to pay taxes on your contributions now and avoid paying them when you withdraw the money.

6. Direct Deposit Is Your Friend

The easiest way to not spend money is to not have it. Keep this in mind when you sign up for a 401(k) and choose the amount that should be deducted from your paycheck and deposited into the plan. You should also factor in potential bonuses or raises when determining your contribution amount.

Saving enough money for retirement doesn’t happen overnight, but there are a number of financial tools, advisors, and plan types available to help you make the most of your savings and help you plan for the future.

Ringing in the New Year With 401(K)

From letting go of vices to dedicating time for some inward reflection, there is no denying that the start of every new year is a time for reflection, looking to the future, and abandoning what didn’t work in the past.

When was the last time you examined your 401(k) business plan? Do you have a 401(k) plan for your business? Are you sure that your current plan is doing everything for you and your employees that it can? If you answer any of these questions with uncertainty or hesitation, it may be time to spend some of that reflection time on your retirement planning strategy.

401(k) Plan Types and Benefits Offerings

A 401(k) is a product that is often purchased by a business when their income begins to increase. Attractive to new and potential hires, a Safe Harbor 401(k) Plan is a type of plan where you, as a business owner and your employees, can defer up to $18,500 of pre-tax dollars into the plan.

When your business begins to become even more successful, then the day may come when the formula will need to be analyzed to see if it is truly maximizing what it can do for you and your employees. This is the point where a Safe Harbor New Comparability Formula may prove helpful financially for the businesses owners.

And then last but not least, if there’s a big need for tax deductions, and because your once-humble business has now become extremely successful ($270-thousand-dollar+ revenue per year), then you may be looking for something a bit more supercharged than what a standard 401(k) profit-sharing plan can offer. In cases such as these, a Defined Benefit Plan could allow employers/business owners to receive well above the $50 to $55 thousand dollar-a-year limit that can then be put into a traditional profit-sharing plan. A Defined Benefit Plan allows significantly higher contributions than a Profit Sharing Plan.

Participation Is Key

401(k) plans are available to companies both big and small with no minimums. It is crucial however to pick a provider that does on-site enrollments rather than just having the employees visit a website to learn about the plan. Ultimately, a website is never going to excite an individual into putting their own money in and if they don’t contribute, then the plan won’t work as efficiently as it could if the employees decide to contribute.

If your business does not offer a 401(k) plan as a part of its benefits package, you could be missing out on valuable talent that may seek work elsewhere—perhaps with other businesses that do.

How Student Loan Debt is Impacting Businesses and Employees

According to The Federal Reserve, U.S. student loan debt reached $1.7 trillion in 2020. The Coronavirus Aid, Relief, and Economic Security (CARES) Act provided some relief by pausing eligible federal loan payments, but experts predict that loan deficits will continue to be a concern for years to come – not only for borrowers, but also their employers. Let’s look at a few ways this can affect businesses, and what employers can do about it.

Employee Moonlighting

With the average student loan debt reaching almost $37,000 (at the time of graduation), it’s no surprise that borrowers are taking on second jobs to help pay down their loans. In 2018, almost 8% of the U.S. workforce was working more than one job – a trend that has increased steadily since the mid-1990s.

But working multiple jobs can have drawbacks. For instance, more time on the job means less time sleeping, eating, resting, and practicing self-care. When this cycle continues for a period of time it can lead to fatigue, exhaustion, and workplace burnout – which can take anywhere from weeks to years to recover from. So while working additional jobs may seem like a good solution, it can actually cause a cascade of problems for both employees and employers.

Mental Health

Financial debt has been known to cause serious emotional effects, such as depression, anxiety, and stress. While moderate and manageable levels of stress, also called eustress, can be beneficial, higher levels of stress can have a damaging effect. Chronic, heightened stress has a direct link to poor physical and mental health. In a study by the American Psychology Association, results showed that 64% of graduate students say their financial debt distresses them to the point of interfering with their “optimal functioning”. Financial burdens have been tied to issues with absenteeism, presenteeism, and decreased productivity – all of which have resulted in billions of dollars in losses by U.S. businesses.

Addressing the Need

Companies are waking up to these issues. As awareness grows, businesses are implementing loan repayment assistance benefits. In just a single year, the number of companies offering these benefits doubled in an effort to increase employee satisfaction and retention rates. According to one survey, 86% of employees said they would entertain a five-year commitment to a company that helped them repay their student loans.

If financial wellness isn’t already a part of your company’s employee benefits package, it may be something to consider adding.

couple with young child playing

Is Your Emergency Fund Ready?

Emergencies are unpredictable, but the money you set aside to cover unexpected expenses (usually big ones) can help.

Along with paying off debt, an emergency fund should come before other financial goals like saving for a down payment on a home, funding your child’s future college, and even investing for your retirement.

Planning Ahead

Conventional wisdom suggests keeping your emergency fund in a place that’s safe and readily accessible (like a savings account). But with interest rates so low, why set aside money you hope to never use in an account where it’ll earn little to no interest?

A safe approach would tread the line between reasonable liquidity (knowing your money will be there when you need it) and growth (earning enough interest to at least keep pace with inflation).

The Cost of Financial Safety

The first step to determining how much money you should be saving will require you to determine what your household spends in a typical month. Next, separate the costs of the necessities from the non-essentials. Lastly, take the monthly cost of your necessities and multiply it by at least three. Industry experts recommend saving enough money to cover at least three to six months of living expenses.

Taking the Next Steps

Financial wellness can bring you peace of mind and help you live well today and plan for tomorrow. That’s why it is important to be proactive in regards to topics like these. Finetune your emergency fund plan ahead of time to relieve yourself of the stress, in case that emergency fund is needed down the line.