Strategies to Maximize Your 401(k) Contributions

Saving for your financial future requires more than the bare minimum.

Given the cost of today’s retirement, it’s worth doing what you can now to maximize your 401(k) contributions.

Why 401(k) Contributions Are Essential for Retirement

Retiring isn’t cheap.

Once you stop working, you are still expected to pay the bills.

And they can add up…fast.

Maximizing your 401(k) contributions – whenever and however – is critical to making sure you have enough saved. It doesn’t guarantee it, but it may help more than you think.

And you’re going to need all the money you can as the cost of retirement continues to grow.

Many Americans are worried that they won’t be able to quit working and retire.

Medical issues tend to occur more often as we grow older, which is why it is important to factor medical costs into the cost of retirement.

“According to the Fidelity Retiree Health Care Cost Estimate, an average retired couple age 65 in 2022 may need approximately $315,000 saved (after tax) to cover health care expenses in retirement.”¹

Keep in mind that Medicare does not cover everything – you may be responsible for paying for other medical necessities, such as dental, vision, or hearing aids.

[Related Read: The Real Cost of Retirement: Are You Saving Enough?]

In addition to building a healthy nest egg, it is essential to make 401(k) contributions so that you take advantage of compounding growth.

Here’s how it plays out in your 401(k):

• Initial Investment: You contribute money to your 401(k).
• Earnings: Your investments generate returns (interest, dividends, capital gains).
• Reinvestment: These earnings are automatically reinvested back into your 401(k).
• Compounding: The following year, you earn returns not only on your original contributions but also on the previous year’s earnings.

This cycle repeats year after year, creating a snowball effect where your earnings generate even more earnings.

Over time, the impact of compounding becomes exponential, leading to significant growth in your retirement savings.

Here are 4 strategies to help you maximize your 401(k) contributions.

Strategy #1 Pay Yourself First and MORE

One of the smartest financial decisions is to pay yourself first.

Paying yourself first means saving money for yourself and your future before you pay anyone else (e.g., bill collectors).

Make paying yourself a priority and budget for retirement savings.

This is even easier once you set up automatic contributions.

But don’t stop there! Pay yourself MORE!

Look for opportunities to increase your 401(k) contributions, such as boosting your regular contributions according to your raise – rather than boosting your lifestyle.

Or taking the money from your tax refund and putting it in your 401(k).

Another option is to utilize automatic escalation of contributions, where the amount you contribute gradually increases each year.

Don’t forget – Those ages 50 and older can take advantage of catch-up contributions. The 401(k) catch-up contribution limit is $7,500 in 2024.

Strategy #2: Leverage Your Employer Match for More Money in Retirement

Another tried-and-true way to maximize your 401(k) contributions is to leverage your employer match.

Some employers offer a partial match where they match up to 50% of what you contribute up to 6%.

Other employers offer a dollar-for-dollar or 100% match of what you contribute up to a specific percentage.

Whether it is a partial match or a full match, it is still FREE money!

Even a small company match, such as 50 cents on every dollar you contribute up to 6% of your salary, doubles the effect of your contributions on a portion of your paycheck.

That’s an instant 100% return your employer is providing.

Note – It is important to know your plan’s employer match rules. For example, some companies require you to contribute a certain percentage to get the full match.

[Related Read: 3 Reasons to Get the 401(k) Company Match in 2024]

Strategy #3: Rebalance Your Portfolio Regularly

The initial investments you made may not be performing as well as you’d like.

That’s why it’s important to rebalance your portfolio to maximize your 401(k) savings.

Rebalancing involves buying or selling assets regularly in your portfolio to maintain the initial desired level of asset allocation.

[Related Read: What Every Investor Needs to Know about Rebalancing a 401(k)]

Strategy #4: Be an Engaged Investor

Don’t set up your 401(k) and forget it.

Instead, get engaged.

It’s your future and your money, so you should take an active role in understanding how it works.

• Read your 401(k) statements. If you aren’t sure how to read them, watch this video.
  
• Ask questions if you don’t know something. Start by reviewing some of our most frequently asked questions and answers. Then, reach out for more help.
• Review and rebalance your investments. As you review your 401(k) statements, ask yourself if the investments you have are working for you.
  

Additional Tips to Maximize Your 401(k) Contributions

In addition to the 4 strategies shared above, there are more choices you can make that may help maximize your 401(k) contributions.

• DON’T cash out your 401(k) early. When you are tempted to withdraw funds, hold strong. You want to allow your money to continue to grow, and you need to avoid penalties. [Related Read: 401(k) Early Withdrawals May Cost You More Than You Think]
  
• Consider Roth 401(k) options. More employers are offering a Roth 401(k) option inside their plans. Do some research and see if this option is the right choice for you. [Related Read: Should I Consider the Roth 401(k)?]
• Seek guidance from a financial advisor. 401(k) Maneuver provides professional account management with the goal of helping you grow and protect your 401(k). Our goal is to increase your account performance over time, manage downside risk to minimize losses, and reduce fees that harm your account performance.

Have questions or concerns about your 401(k) performance? Book a complimentary 15-minute 401(k) strategy session with one of our advisors.

Book a Strategy Session

Sources

1. https://www.fidelity.com/viewpoints/personal-finance/plan-for-rising-health-care-costs

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