Whether you're nearing retirement or still in the workforce, you probably wonder if there’s enough in your 401(k) to sustain your golden years. The answer really depends on your personal financial situation. Here's what you need to know...
A 401(k) is a powerful retirement savings tool. If you have access to it through work, it's important to take advantage of any employer match. If you still have extra money remaining, there are other ways to boost your retirement nest egg.
Maxing out Your 401(k) and What to Do Next
There are a number of reasons to consider maxing out your workplace retirement account if you’re financially able. Being proactive in your retirement planning will help ensure you will live out your older years in comfort, so it's important to understand the ins-and-outs of this practice. Here are some of the options you have available to make the most out of your retirement savings strategy.
Employer Matching & 401(k)
Employers offer their employees 401(k) plans, most may match contributions in order to compensate and attract employee involvement. This means that for every dollar you contribute to your employer-sponsored plan, the company matches a certain percentage. This increases the amount of money saved in your account. Some match as much as 50% of your contribution while others do a dollar-for-dollar match up to a certain limit.
Roth 401(k) plans are typically matched by employers at the same rate as traditional 401(k) plans. One notable difference between traditional and Roth 401(k) contributions is that the employer's contribution is placed in a traditional 401(k) plan—taxable upon withdrawal. Most financial planners encourage investors to max out their 401(k) savings.
On average, individuals earn about $0.50 on the dollar, for a maximum of 6% of their salaries. If you can easily afford to max out your contribution based on the yearly limits, without it causing a large impact to your budget, you might want to do so.
Investing after Maxing out your 401(k)
Although 401(k) offerings can be hard for some newcomers to understand, most programs offer low-cost index funds, which are ideal for new investors. As you approach retirement age, it's advised to shift most of your retirement assets to bond funds. Those who contribute the maximum dollars to their 401(k) plans can boost their retirement savings with a number of different investment vehicles.
You can contribute up to $6,000 to an individual retirement account (IRA) in 2021, provided your earned income is at least that much. If you're 50 or over, you can add another $1,000, although some IRA options carry certain income restrictions. When it comes to your future, investing money is always a good thing to do. Diligent savers who max out their 401(k) contributions have other retirement savings options at their disposal.
When it's NOT a Good Idea to Max Out Your 401(k)
The maximum 401(k) contribution is $19,500 for 2021 ($26,000 for those age 50 or older). But depending on your financial situation, putting that much into an employer-sponsored retirement account each year may not make sense. Rather, you may want to fund other accounts first.
When trying to decide what route is best for your financial future, meet with your trusted financial advisor to go over the following questions:
- Do you have an Estate Plan in place? (This should include a basic will and trust plan.)
- Do you have an emergency fund saved? (This should be around 6 month's worth of living expenses)
- Do you have an Insurance Strategy in place? (This should include health insurance, disability insurance, long term care insurance and life insurance.)
- Do you have any large debt hanging over you? (If so, pay that off ASAP.)
If the answer is "no" to any of the checklist items above, it is wise to first have these goals in place before maxing out your 401(k). If you’re unsure about your current strategy, it's best to work with a financial advisor so they can answer your questions as they come up.
Final Thoughts
Whether you need the extra money or not, you’ll need to start taking it out of retirement accounts at age 72. This forces retirees to recognize taxable income and sacrifice future years of tax-deferred growth. Even if you reinvest the money in a brokerage account, you’ll still have to pay regular income tax on withdrawals from pre-tax retirement accounts. This is one of the reasons investors often save for retirement in a diversified mix of taxable, tax-free Roth, and tax-deferred accounts.
Plans that don’t bend will break, so flexibility in your savings strategy is paramount. The more you’ve saved along the way in your working years, the easier it will be to deal with unexpected challenges as they arise. Whether you’re already retired or just starting to think about it, contact the retirement income advisors at Agemy Financial. We'll help you find answers to some of the most pressing 401(k) and IRA questions, and help set you up for a stress-free retirement.