Top 401(k) Tips | Investment Insights | Retirement Advice | Diversified (2024)

The 401(k) is generally synonymous with retirement planning. Quite frankly, they are some of the best vehicles out there for the average employee. They provide great ways to defer money from your payroll on a pre-tax, or post-tax, basis for retirement. Today I’m going to focus on my top tips for optimizing your retirement through your 401(k).

Top Tips:

1. Sign up immediately– The old Chinese proverb goes “a journey of a thousand miles starts with the first step.” If you aren’t contributing to your 401(k), do it now! It is probably my number one retirement tip in general, as it is a great way to set it and forget it.
2. Minimum contribution– Now even if things are tight in your life, I highly suggest contributing to at least the minimum your company will match. For instance, if your company matches on the first 6% you defer, then put minimum 6% away. Otherwise, you are leaving literally free money on the table. Now my hope is that this truly is the minimum, but this should be your first target.
3. 10%-15%– The general rule of thumb is to elect a minimum of 10%-15% of your salary from day one to defer into your 401(k). This will typically have you in a pretty good position when it comes time to retire.
4. Max out– If the minimum target to save is the company match, and the minimum target for a good retirement savings rate is 10%-15%, then what is the maximum we can contribute? Well, in 2021 if you are under 50 years old you can contribute $19,500 with a $6,500 catch-up amount for those 50 or older. Two comments to note here. One, everyone’s goal should be to max out as soon as they can. Two, keep a lookout year-to-year as the government tends to increase these limits frequently.
5. Auto increase– A cool feature I am a big fan of is the auto increase feature. This nifty little feature is one everyone should be checking. It will increase your 401(k) contribution 1% a year until you hit the IRS maximum. I find most people don’t even notice the marginal change and it goes a long way in getting your retirement savings on the right track.
6. Before or After tax– Ah, likely the hardest decision most of us have, if offered. A lot of companies now offer both a pre-tax option and a Roth 401(k) option. Now don’t be confused whatever you choose (or combo) is still subject to the IRS limits in aggregate. Thus, not allowing you to contribute $19,500 to both accounts. That said, what is the right decision for you? This is very personal and I find a good topic to discuss with your financial planner. That said, a good rule of thumb is the higher your income bracket is, the bigger the benefit of pre-tax contributions are as you’ll likely be in a lower tax bracket at retirement. Of course, the opposite is true for Roth 401(k) contributions. If you are in a modest tax bracket it may behoove you to contribute to the Roth and take the tax hit now in hopes of never paying taxes on those dollars ever again. Remember, whatever you choose the company match always goes in pre-tax.
7. How much should you have– Again, I think the best way to answer this is always to consult with a financial planner. This way you can truly hone in on your specific needs. That said, for a quick reference guide go by these guidelines based on a study Fidelity did. At age 30 aim to have one times your salary saved in your 401(k), thus if you earn $75,000 your 401(k) balance should be $75,000. By age 40 aim to have three times your salary saved. Age 50 the goal is six times, while at age 60 the minimum target is eight times your salary. This is a good basic guideline to reference. That said, I like to overachieve and you can’t have too much stashed away generally. So if you ask me I’d aim to increase these targets by 25% to really feel good.
8. Brokerage window– Here is a dirty little secret. A lot of 401(k) providers offer a brokerage window in their plans. If so, and you have some solid investment guidance, I am a big proponent of these offerings. Essentially, they allow you to pay a nominal fee to elect to open a brokerage window within your 401(k). You can then move your balance within the plan to this brokerage window. Once complete you’ll have generally hundreds to thousands of investment options, rather than the normal dozen or so your provider offers. This can be overwhelming if investing isn’t your strong suit, but good news….. I know someone who can help with that 😊!
9. How to invest– Regardless of the options everyone has the same question, how to allocate your 401(k). Conventional wisdom is the younger you are the more “aggressive” or equity based your allocation should be. I don’t necessarily subscribe 100% to that belief. Rather, I think it is a personal decision based off of your goals and risk tolerance. I also think that it behooves everyone to do a little education on historical trends of both the stock and bond markets. This is a great way to get comfortable with the level of exposure to each asset class.
10. Target Date funds– Most 401(k) plans offer target date funds these days. These are funds where you choose a retirement date and basically let it ride. The funds will shift through the years to a more and more conservative allocation (or more bond focused). For some these are simple and get the job done. For me, I hate them. There are additional costs to them in most cases, but that isn’t really my biggest gripe. The fact of the matter is investing, and investment allocation is a very personal decision. It more importantly is one that should be based off goals and needs, rather than arbitrary age allocation. Again, if uncomfortable allocating yourself good news for you our phones are always on.
11. Rebalance– Often missed or misunderstood rebalancing is generally a great tool. By selecting this option (we like quarterly) your 401(k) will at some chosen interval be rebalanced back to your preselected allocation. Why is it important? Because otherwise you may find your 70/30 allocation can drift into a 90/10 allocation and leave you exposed and out of your desired comfort zone.
12. Active vs. Passive Funds– The age-old debate continues of using actively managed or passively managed (index) funds in your plan. Truth be told there are benefits to both. That is why here at Diversified we like them both. There are certain time periods, and sectors that will benefit from both active and passive management. We like to get exposure to both in hopes of smoothing out the ride.
13. Diversification– In general it is a good idea to hold many different funds in different sectors. This way you smooth out the ride a bit and don’t put all your eggs in one basket. It also can go a long way in protecting the downside from one sector decimating your retirement savings. What is the right allocation for you? That depends on many factors that can’t be answered today.
14. Old 401(k)’s– What to do with all those 401(k)’s sitting there form old employers? Simple! Roll them into an IRA or Roth IRA (depending how you contributed in the first place). This way A. you have endless investment options vs. what the employer offers. B. If you consolidate them into one IRA it becomes more manageable and more front of mind. These are tax-free to do and relatively easy. The benefits can be enormous if you handle it correctly.
15. Do a 401(k) audit– Once a year I would do a 401(k) audit for yourself. You don’t need to look at this stuff every day or even every month. But annually there are things you want to keep an eye on. What I would be looking at are the following:
    • Any new funds available?
    • Is your allocation still appropriate?
    • How has the performance been?
    • Any new features like Roth or open architecture?
    • Is your contribution rate where it should be, or can you do more?
    • If intending to max out, are you on track to hit your limits? Furthermore, if 50 or older have you selected the catch-up option?
    • Are you receiving the full employer match? Sometimes, if you hit the max too early some employers won’t give you the full benefit of the match.
    • Double check your beneficiaries. They still split the way you want?
16. After Tax Strategy– Final thing to mention, that is currently under the government’s target to eliminate is what we call the Mega Back-Door Roth. In short, if your employer allows after-tax (different than Roth) contributions there is a neat strategy. You can contribute above and beyond the $19,500 limit (up to $58,000 including all sources if under 50) to an after-tax bucket. Than typically once a year you can convert just the after-tax dollars to a Roth IRA of your own effectively making a substantial Roth IRA contribution each year from already after tax dollars. A lot of nuisances here so I highly suggest consulting a financial professional.

My Tips

There you have my biggest 401(k) tips. I know there is a lot to digest and even more to understand. I’m hoping this can act as a good starter guide to educating you on what to keep a lookout for. That said we are always here to help and take your 401(k), and all retirement savings, to the next level.

As always stay wealthy, healthy, and happy!

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