Editor
The start of a new tax year can be a time for resolutions for many of us. Financial resolutions are common including saving more for retirement. For many people, a 401k is their main retirement savings vehicle, so it's important to make sure to get the most out of it.
For those who want to make saving for retirement a priority in 2016 and beyond, click through to see 27 steps to get you started on maximizing your 401k.
Debt can be a major obstacle to meeting your financial goals. However, "getting out of debt frees up your largest wealth building tool: your income," said Chris Hogan, author of "Retire Inspired." "When you're out of debt and ready to invest, you'll have a lot more money to put toward your retirement, and you won't be looking over your shoulder at your creditors because you won't have any."
If you don't have the safety net of an emergency fund, you're putting your financial future at risk. "If you have no emergency fund, but you do have a 401k, guess what happens when a big emergency pops up?" Hogan said. "Your 401k becomes your emergency fund and you'll lose up to 40 percent of your money to taxes and penalties in the process. That's a bad plan."
There are opportunities to save more money every day if you look, said Stuart Robertson, president of Capital One's ShareBuilder 401k. "Think about ways to invest a portion of your everyday budget," he said. "For example, buying a premium cup of coffee each weekday adds up to $650 a year. Putting away incremental amounts of money on a regular basis is a critical first step."
One of the most important elements of retirement planning is time. Even if you invest a small amount getting started early is the key to success, said wealth manager Canon Hickman of Equity Concepts Private Wealth Management.
"Let's say you invest $100 a month starting at age 25, and retire at age 60," he said. "Your account earning 7 percent would have grown to $165,884. But if you decided to wait until age 35, it would only have grown to $75,898. Even worse, if you waited until age 40 to start investing, you would have to save more than three times as much each month just to catch up by age 60. So get started early, and it'll position you for success later on down the road."
While it's ideal to start saving early, it's still important to save no matter when you start. Robertson said people 50 or older can use tax advantaged options to help them invest more in their retirement accounts.
"In 2016, investors 50 or older can contribute up to $24,000 in pre-tax personal contributions to a 401k, which is $6,000 more than investors under 50 can contribute each year," he said.
Perhaps one of the most important investment choices to make is finding a professional investment advisor. "A good financial advisor will help you choose the right options for your situation," said Hogan.
"That phrase 'help you choose' is extremely important," he added. "You never want to pay someone to make your decisions for you - that's your responsibility. An investment advisor's primary job is to teach you how things work and empower you to make your own decisions."
You can use a computer system to manage your investments which might sound easy, Hogan said. "But if you depend on a computer to manage your investing you won't give it a second thought, and that's a bad idea," he said. "You should use your computer to track your investment plan, but never use [it] to determine your plan."
Many companies offer some form of a matching contribution which is one of the biggest advantages of a 401k, said Catherine Golladay, vice president of 401k Participant Services at Schwab. So it's important to make sure you save enough to get the full match.
"For example, it might be a match of 50 cents for every dollar you contribute up to 6 percent of your salary," she said. "If your employer does offer a match, I strongly encourage you to contribute enough to take advantage of it in full because the match is like an automatic return on your investment that you can't get anywhere else. In fact, I always say this should be your No. 1 financial priority even before paying down debt."
Knowing your company's matching and vesting schedules can help you plan to better maximize your 401k. "For example, at my company they match a 5 percent contribution 100 percent for three years, after three years their contribution vests," said finance blogger Elizabeth Stapleton. "After three years, they will also increase their match of a 6 percent contribution with a 7 percent contribution, 100 percent the first 5 percent and 200 percent the next 1 percent."
Saving enough to get the employer match is the right first step, but maxing out your 401k - the 2016 maximum of $18,000, or $24,000 for those over 50 - can really boost your efforts to meet your retirement goals, said Golladay.
For people over 50, personal finance author Valerie Rind suggested another way to make sure you maximize your contributions. "An easy way to do this is to contribute exactly $2,000 per month, instead of trying to calculate a percentage of your gross income," she said. "If you didn't contribute $2,000 in January, adjust your contributions for the rest of 2016 so you can reach your $24,000 total."
"Many 401k plans offer some sort of help, such as investment advice or account management from a third party financial professional," said Golladay. "If this resource is available, commit to taking advantage of it." Schwab Retirement Plan participants who used third party, professional 401k advice were more likely to "increase their savings rate, were better diversified and stayed the course in their investing decisions," she added.
When it comes to picking your investments, past performance isn't the only factor to consider, said accountant Michael Eckstein. "There are a lot of other factors involved in choosing a good investment, such as overall portfolio diversity, personal risk tolerance and fees."
It's important to hold a diverse range of investments that align with your goals and risk tolerance, said Golladay. "January's stock market volatility may have skewed your allocations, so this would be a good time to rebalance to ensure you have a mix of assets that are appropriate to your risk tolerance and investment strategy," she said. Some plans offer auto-rebalancing at certain intervals which might be worth considering, she added.
Make sure you're not paying too much in fees as that reduces what you can save over time. Check to see if your plan offers lower cost options.
"Increasingly, lower cost investment products, like index mutual funds and exchange traded funds, are making their way onto 401k menus," said Golladay. "By selecting these for your portfolio, you can put fewer dollars toward management fees and more into your account."
If you have any old 401ks from previous jobs, find out what you need to do to address them. "If you recently started a new job, you may very well have a 401k from your old employer," said Golladay. "This would be a good time to explore your options which include rolling it into an IRA, moving it to your new plan or leaving it alone. If you choose the last option, be sure your investment options reflect your current preferences."
When you're strapped for cash, it might be tough to resist the urge to dip into your 401k for a loan. "Taking a 401k loan can significantly derail your long term savings plan, and comes with plenty of financial penalties and potential tax consequences," said Golladay. "Remember, this money is for your retirement, so leave it there until that day comes."
When you've had a major life change, like the birth of a child, a marriage or a divorce, it's time to review and update your 401k plan's beneficiary designations so they're in line with your current situation, said Golladay. "If you're married, your spouse automatically gets the money unless he or she waives that legal right," she added.
This might sound like a simple step, but using the various retirement tools available to you can have a profound impact on the decisions you make. "One example of this is using a retirement calculator to track how savings habits will impact retirement readiness," said Geno Cufone, senior vice president of retirement plan administration for Ascensus.
Nearly 18 percent of calculator users increased their contribution after use, and 37 percent of employees who weren't saving started contributing after using a retirement calculator, according to recent Ascensus data.
When the markets take a dive, your first impulse might be to change your contributions. However, that can work against you.
"Participants should not be tempted to decrease their contribution percent when the market goes down," said wealth advisor Robert Runnfeldt at David A. Noyes & Company. "By adding to their 401K every paycheck, participants end up with a below average dollar cost average price. This takes place because when the market is low, you buy more shares for investing the same amount of money."
Consider diversifying your investments. This can also be a helpful strategy if you can't afford to contribute the annual maximum to your 401k, said personal finance writer Julie Rains. "Set up your 401k to max out your contributions. Sell your concentrated position, either a large portion annually, or a couple of thousand dollars monthly," she said.
"This sale generates the cash that allows you to have the funds needed to max out your 401k account," she added. "Note that this path may not liquidate your concentrated holding as swiftly as you should, but offers a steady way to diversify."
If you're invested in company stock, be sure you're still well diversified. "Check to make sure you aren't overloaded on company stock, no matter how well it has performed," said Golladay. "Typically, company stock should make up no more than 20 percent of your overall 401k portfolio."
If you're having trouble getting motivated to save more, or to even start saving, remind yourself of the longer range benefits and your retirement goals. "Consider this: Saving $10,000 a year for 30 years at a 7 percent growth rate would yield about $1,060,000 at retirement," said investment advisor Betsy Vallone. "Remember, your money not only grows tax deferred, but there is a big tax savings in the year you contribute."
If your employer's 401k plan has a Roth option, it's worth looking into, said financial advisor Denise Halford with David A. Noyes & Company. "Since a majority of 401k assets are pretax, many [people] do not realize that the distributions from this lifelong savings vehicle are fully taxable in retirement."
"For example, if you have $200,000, and are in a 25 percent tax bracket, you actually only have $150,000," she said. "However, if this money were in a Roth 401k, you would have the entire $200,000, since the contribution was taxed initially. This option tends to be very beneficial to younger workers. One should consult a financial advisor to investigate this option."
Many plans offer an auto-increase feature to help participants save a larger percentage of their salary each year, said financial advisor Daniel Zajac. Enrolling should be relatively easy.
"Simply log into your account and check that box enrolls you in the program," he said. "Once enrolled, your annual deferral should increase each year without you doing anything. For example, if you are currently contributing 5 percent, the following year your deferral will increase to 6 percent. Do this for a few years, and your savings percentage could double in no time."
Target-date funds are big business for the mutual fund companies offering them. They also represent a "safe harbor" from liability for your employer if they're used as the plan's Qualified Default Investment Alternative. This doesn't mean they're a bad option, but you should do your research to make sure they're the best option for you.
For younger investors or those who don't have investments outside of the plan, a target-date fund offers an instant diversified portfolio for them. Before you decide, make sure you understand how the fund invests your money, the glide path into retirement, the fund's expenses and the level of risk. Also, don't always assume that the fund with the target date closest to your anticipated retirement date is the right one for your situation.
One way to save more money is to take action when you're making more money. "Don't forget to increase your savings when your salary grows," said Andrew Meadows, vice president of brand and culture at Ubiquity Retirement + Savings. "That big bonus you've been waiting on - bonuses are subject to 401k contributions."
Put in more money whenever you can, he said. And when you change jobs, your new job might have even better benefits, so it's a great time to increase your contribution if your new job pays you more money.
If your plan is lacking in options that work well for you you might be able to change that. "One little known way to maximize your 401k in 2016 is to ask the person at your company who is in charge of the 401k plan to add more options to the plan," said Kirk Chisholm, a financial advisor at Innovative Advisory Group.
"Many plans offer between five to 25 mutual funds options, but 401k plans are not limited to mutual funds," he said. "Some plans allow you to self direct your 401k account into a lot of mutual funds, or even individual stocks, bonds, ETFs and other traded securities."
The bottom line: It can't hurt to ask your company to add more options, he said. After all, this can be a win for everyone, since companies tend to offer 401k plans to make their employees happy.
