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How to Increase Your Retirement Savings

By ShareBuilder 401k

How to Increase Your Retirement Savings: Maximizing Your 401(k) Contributions

Planning for retirement can seem like a daunting task, but it's crucial to ensure financial stability and comfort in your later years. A significant part of this planning involves maximizing your 401(k) contributions the best you can. In this blog, we'll explore various strategies to boost your retirement savings, the power of compounding, and actionable tips to optimize your 401(k) plan. We aim to answer your questions on how to effectively manage and grow your retirement funds to secure your future.

How much should I contribute for retirement each year?

Most financial experts recommend contributing 10%-15% of your paycheck toward retirement over a 40-year career will get you there. However, many people either start late or are not contributing this amount. The sooner you start and the more you can contribute, the more opportunity you have to utilize the power of compounding interest, dividends, and security price growth.

Give your 401(k) a raise when you receive a raise – even 1% can benefit your retirement!

Increasing your 401(k) contributions by just 1% each year can have a substantial impact on your retirement savings. This gradual increase ensures you're moving towards maxing out your 401(k). One strategy is to increase your 401(k) contribution by 1-2% each time you receive a raise at work. This way, you can still enjoy higher take-home pay while also boosting your retirement savings. By steadily increasing contributions, you enhance your retirement savings with lower impact to your current lifestyle.

What is the power of compounding, and how does it work?

Compounding is the process where the value of an investment increases because the earnings on an investment, dividends, stock and bond prices, and interest, continue to reinvest and grow as time passes. This means your money can grow faster over time. Let's delve into a hypothetical example to illustrate this.

An Example on the Magical Power of Compounding

Imagine Anne contributes $10,000 per year to her 401(k), which is approximately $833 per month. Her employer matches $4,000 annually, equating to $333 per month. Assuming an 8% return on her investments each year, Anne will have accumulated nearly $700,000 in 20 years from a total contribution of $280,000 ($200,000 from her and $80,000 from her employer). That's well more than double the amount she put in. The benefits of compounding grow exponentially over more extended periods. If Anne continues her contributions for 40 years, she will accumulate over $4,000,000 from a total contribution of $560,000 ($400,000 from her and $160,000 from her employer). This substantial nest egg allows Anne to retire comfortably and pursue her dreams and passions. The key takeaway? Contribute regularly to your 401(k) and harness the power of compounding.
See example below

Power of Compounding

What are some practical steps to maximize your 401(k) savings?

Many of us get busy and forget to review our 401(k) plans regularly. Beyond giving your 401(k) a 1-2% raise when you get a raise at work, here are some straightforward steps that require only 15 to 20 minutes of your time but can significantly enhance your retirement savings:

Regularly Rebalance Your 401(k) Portfolio

Your asset allocation (the mix of stocks, bonds, cash, etc.) significantly impacts your retirement savings. Whether you choose your funds or use a model portfolio managed by experts, ensure your account is auto-rebalancing. Since different assets grow at different rates, rebalancing quarterly or at least once a year helps maintain your desired risk level and prevents overexposure in any one area.

Opt for Low-Expense Investment Options

If you prefer selecting your investments from your company's 401(k) fund roster, look for index funds or other low-expense options. Historically, low-expense funds outperform high-expense funds over time. Checking the five- and ten-year performance numbers can provide additional assurance but do know the past does not guarantee future returns. Even saving one percent in investment expenses over a 30-40 year career can add up to hundreds of thousands of dollars in additional savings. And if the lower expense funds perform better too, which historically is true, the rewards can be even greater.

Consider Roth 401(k) Contributions

Evaluate your earnings and tax situation to decide if making Roth 401(k) contributions are beneficial. If you expect to be in a higher tax bracket in the future or are simply expecting the government to increase tax rates over time, contributing at least some of your deferrals to the Roth 401(k) option might be advantageous. This approach allows for tax-free withdrawals in retirement, providing flexibility in managing your tax liabilities.

Consolidate Old 401(k) Accounts

If you have a 401(k) account from a previous employer, consolidating it into your current 401(k) can simplify management and ensure you don't lose track of your savings. Having a single account makes it easier to monitor and adjust your asset allocation. However, ensure your current 401(k) plan offers the diversification and low-expense options you need. If not, an IRA might be a better consolidation option.

How can you ensure your 401(k) is on track for your retirement goals?

Monitoring your 401(k) regularly is crucial to ensure it's aligned with your retirement goals. Here are some key practices to adopt:

Schedule Regular Check-Ins

Set a reminder to review your 401(k) at least annually. During this review, assess your contribution rate, investment choices, and performance. Adjust your contributions and asset allocation as needed to stay on track with your retirement goals.

Take Advantage of Employer Matching

Maximize your employer's matching contributions. Not doing so is like leaving free money on the table. Ensure you're contributing enough to get the full match from your employer, which significantly boosts your retirement savings over time.

Stay Informed About Your Plan's Features

Understand the features and options available in your 401(k) plan. Many plans offer tools and resources to help you make informed decisions. Use these tools to optimize your contributions, investments, and overall strategy.

Consult a Financial Advisor

If you're unsure about managing your 401(k), consider consulting a financial advisor. They can provide personalized advice based on your financial situation and retirement goals, helping you make the most of your 401(k) plan.

Key Takeaways

  • Target to contribute 10-15% of your earnings for retirement: Most experts agree over a career, saving 10%+ of your income will enable you to be retirement ready. If you are unable to start at 10%, there are sound tactics to help get you there.

  • Increasing your 401(k) contributions annually: Incrementally increasing your 401(k) contributions by 1% each year can significantly enhance your retirement savings due to the power of compounding.

  • Understanding the power compounding: Compounding allows your investments to grow exponentially over time, resulting in a substantial retirement nest egg.

  • Maximizing your 401(k) savings: Simple steps like increasing contributions with raises, rebalancing your portfolio, opting for low-expense funds, considering Roth 401(k) contributions, and consolidating old accounts can boost your retirement savings.

  • Regularly monitoring your 401(k): Regular annual or quarterly check-ins, ensuring you are receiving your full employer matching contribution, staying informed about your plan's features, and consulting a financial advisor as needed are good fundamental practices to keep your 401(k) on track to reach your retirement goals.

  • By following these strategies and regularly reviewing your 401(k) plan, you can ensure you're making the most of your retirement savings and setting yourself up for a financially secure future. Start today and take control of your retirement planning to enjoy a comfortable and fulfilling retirement.

Conclusion

Maximizing your 401(k) contributions and effectively managing your retirement savings can lead to a secure and comfortable retirement. By understanding and taking advantage of the power of compounding, increasing your contributions gradually, making informed investment choices, and regularly monitoring your plan, you can significantly enhance your retirement nest egg. Start implementing these strategies today and set yourself on the path to financial freedom and a fulfilling retirement.


Meet the Author

Our low-cost 401k plans are easy to setup online and are supported by our 401k advisors and specialists. ShareBuilder 401k serves small business and medium-sized companies, as well as the self-employed. We offer Roth 401k, Safe Harbor 401k, Traditional 401k, and Solo 401k options. Your 401k plan is paired with investment management expertise and employee education to help you save more.