Maximizing Your 401(k)

By Hightower Westchester on December 4, 2023

One of the most important pieces of one’s financial picture is retirement savings. Despite this importance, some of the more common financial mistakes individuals make are not saving enough for retirement and how one saves and invests for later in life. This blog will cover how you can take advantage of a key retirement savings vehicle:  your employer-sponsored retirement plan, which for many is a 401(k) or 403(b). We also have an exciting announcement about how our team can now actively manage those accounts of our clients, but we’ll get to that a bit later.

Almost eight in ten workers who have a 401(k) or similar retirement plan at work take advantage of it, according to the 23rd Annual Transamerica Retirement Survey of Workers.¹ But about half of those workers contribute less than 10% of their annual salary!¹

Contributing any amount is great, and even better if you don’t touch it until retirement. Making intelligent moves to maximize your 401(k) today can give you a richer retirement later and maybe even allow you to retire a few years before your peers.

Most advisors would start this conversation by talking about how much someone should contribute to their 401(k). Instead, we’re first going to focus on how the money in your 401(k) is invested. Time and time again, we have clients and prospects come into our office and show us how their 401(k) is invested, only for us to determine it’s misaligned with their financial plan and goals.

If you have a 401(k), we recommend working with your advisor to determine if the investments align with your financial plan. Typically, a 401(k) plan has numerous mutual funds and ETFs with fees associated with them, making it hard to know if you’re choosing the right investments. That’s why we’re proud to share that we’ve partnered with a technology platform called Pontera which allows us to manage, monitor, and trade directly inside your 401(k) plan.

Rather than picking the 401(k) investments yourself and checking them “when you get around to it”, or having your advisor help you choose investments once a year without them having the ability to actively monitor and manage the account, our team is now able to access your 401(k). We can help ensure that the right type of asset is owned in the right type of fund in your account. For example, if you have both a pretax fund and a Roth fund in your 401(k), we can see that an investment we expect could grow considerably is in the Roth account, so that the growth won’t be taxed. We can monitor your 401(k)’s performance, make adjustments when necessary, and most of all, ensure the investments are aligned with your financial plan. We’re able to manage money in a client’s 401(k) plan just as we manage money in their accounts with us here at Hightower Westchester.

Now let’s shift to some other ways to maximize your 401(k) and other retirement plans like it.

First off, the company match. The most common 401(k) match is 50 cents for each dollar saved, up to 6% of your pay. If your employer offers a 401(k) match, make sure you save enough to take advantage of it (it’s free money). Capturing a 401(k) match is one of the fastest and most painless ways to boost your 401(k) balance.

Vesting – keep in mind that it could take as long as five years of service for your 401(k) balance to fully vest. Some employers require that as a minimum to be able to keep the company match.

Take advantage of the annual auto-increase contribution. Most 401(k) platform administrators offer the ability for you to increase your annual contribution by a certain percent each year. This is a smart thing to do, as most often, with an annual raise, this increase will not be greatly felt.

And finally, make catch-up contributions if you are over 50 (an additional $7,500 for 2023 and 2024).

So how much should you contribute to your 401(k)? The no-brainer is to contribute enough to earn your company’s matching contribution.

For 2023, it’s $22,500 for someone under the age of 50, and it’s $30,000 for someone 50 or older. For next year, 2024, it jumps to $23,000 for those under 50 and $30,500 for those 50 and older. If you have the financial means, you should work toward saving as much as you can for retirement.

A growing proportion of employers now offer a Roth 401(k) option in which workers can save after-tax dollars, and distributions are tax-free in retirement. A Roth 401(k) generally offers the biggest benefits to young and low-income workers who expect to be in a higher tax bracket later in their career, but it can also add tax diversification and flexibility to the portfolios of people closer to retirement.

Next, here are a few common pitfalls to avoid:

• Forgetting to invest or investing poorly. Often, when you start with a new firm, the default investment allocation is to cash or cash equivalents. Make sure to review the options and invest accordingly. On that front, often individuals can be invested too conservatively or aggressively and/or are not aligned with their ultimate financial plan and goals. Understand the allocation and risk.
• Panicking during a bear market. Retirement plans, like a 401(k), are generally long-term investment strategies (depending on your age). Locking in losses when you see your account drop or selling when things are down is not the right way to build wealth over time.
• Don’t take any pre-mature withdrawals. If you are leaving a firm and going to a new job, make sure to roll over your existing 401(k) to an IRA or roll it into your new firm’s plan. Unless you’re facing homelessness or the inability to feed your family, please do not cash out your old 401(k). Doing so will come with tax penalties, and you’ll lose all of the progress you’ve made by diligently saving over the years.

In the end, taking the time to figure this out could be the biggest financial win of your lifetime. So don’t procrastinate.

A 401(k) or other retirement accounts are a significant benefit for employees, and you don’t want to invest in them blindly. Our team is excited to help clients pursue strong returns in their 401(k) accounts. If you would like to learn more about how we can help ensure you’re maximizing all your 401(k) has to offer, please feel free to reach out.

Richard Flahive – Chief Investment Officer – Hightower Westchester

914.825.8639 – rflahive@hightoweradvisors.com

Sources –

1. https://www.forbes.com/advisor/retirement/how-to-maximize-your-401k/