We all know that a 401(k) is one of the most important retirement planning tools we have: The potential tax benefits and power of compound interest can make it a great savings and investment tool for anyone who practices financial discipline and contributes regularly. But your contributions aren’t the only things to consider when figuring out how to make the most of your 401(k).
First, you should get a copy of your 401(k)’s summary plan description to double check the information you receive from HR when figuring out a 401(k). It can also include more information, like if your plan has a brokerage window, if it allows in-service distributions where you can take withdrawals penalty-free at age 59 ½ even if you’re still working, and if it allows for after-tax contributions to help you save more. It’s also important to look at the fees you are charged, as they can range from less than 0.10% of assets a year to more than 1%. If you have 401(k)s from former employers, you should assess their fees and consider rolling them over.
You may have automatically enrolled to contribute 3% of your salary to your 401(k), so if you would like to contribute more, you will have to adjust. Contributing more might mean saving more for retirement and benefiting from your full employer match. As of 2019, you can contribute up to $19,000 per year to a 401(k) if you are under 50 and an additional $6,000 per year if you are 50 or older if you plan to help minimize your taxes in retirement.
Your 401(k) is a long-term investment: You pay into it for decades and will likely need to rely on it, among other sources of income, for decades in retirement. With a professional advisor, you can run a lifetime income illustration to see how long your 401(k) could last you in retirement, and how much you can withdraw from it each year. You should also consider reviewing your asset allocation as you get closer to retirement to help maintain a risk level appropriate for your age, future goals, and overall financial situation. Finally, remember that your 401(k)’s journey might not end with you: Confirm or update your beneficiary designations with a primary and contingent beneficiary.
It can take a well-trained eye to spot hidden fees or less than ideal investment options, which is why it can be helpful to consult a financial advisor when working to make the most of your 401(k). If you’ve been contributing to a 401(k) plan for most of your career, then it may be helpful for you to schedule your no cost, no obligation financial review. At Arlington Capital Management, we’ll work with you to help better understand your goals for the future and how your 401(k) plan can help to fund your retirement.