Whether your employer offers a 401k, a 403b or a SIMPLE IRA, you should participate because this is the most efficient way to save for retirement. For the purposes of this article, we will refer to a “401k” as a stand-in for all pre-tax employer-sponsored retirement plans. Future articles will cover Roth 401ks and self-employed retirement plans.

More than efficient, 401ks are magical in that they do the following:

Shield your current earnings from income tax. When you contribute $100 to a 401k, your gross income for federal and state tax decreases by $100. This could lower your actual tax bracket.

Exhibit superpowers. Your contributions are invisible to you as you focus on the net pay that gets deposited in your checking account.

Grow exponentially. As your pre-tax contributions earn investment gains, dividends and interest, all of that growth is also shielded from tax and reinvested until retirement.

Now that you are excited to contribute to a 401k, here are some strategies to ensure you get the most from your employer’s plan:

SAVE!

• Get that free money. At a minimum, contribute enough to get the employer match, which is usually outlined as “our company matches 50% of employee’s contribution up to 6% of employee’s salary”. In this example, contribute at least 6%.

• Focus on your contributions. Don’t get hung up if your company doesn’t have a match - you are still saving in a tax deferred vehicle that will secure your retirement.

• Stretch for the maximum contribution - $19,500 for 2021. Save as much as you can pre-tax before adding to IRAs or other investments. 

• Ratchet up your savings. Increase your contribution percentage as soon as you get a raise; before you start getting used to that new take home pay amount. If your raise is 3%, up your 401k by 1 or 2%. Your paycheck will still increase and you will be taking care of your future self at the same time.

• Catch up if you are nearing retirement. You can contribute up to $26,000 annually to a 401k if you are 50 or older.

INVEST!

Pick Investments. Some plans will leave your contributions in cash or a money market if you don’t make selections - don’t let this happen!

Allocate Across Categories. Don’t just pick one Large Cap Growth fund - explore the different offerings including Small/Mid Cap funds, International choices, Fixed Income/Bonds to create a portfolio that matches your risk tolerance and timeline.

Understand Target Date Funds. Many plans offer target-date or lifecycle funds that are pegged to your retirement year (i.e. the Vanguard Target Retirement 2050 Fund). If you are going to choose a target-date fund, make it your whole strategy. Don’t choose multiple target date funds and/or other actively managed funds which will compete with your all-in-one fund selection.

Educate Yourself. If all of this seems overwhelming, schedule a Smart Sister Finance house party or workshop where we will talk about how to get started with investing and how to choose mutual funds in your employer plan.

REVIEW!

Check in once or twice a year and do the following:

• Review overall account performance.

• Evaluate Investment offerings. Occasionally your administrator might make a switch and choose a similar investment that doesn’t perform as well, or leave your contributions in cash until you pick a new fund. 

• Rebalance when needed. You can update how your current investments are allocated, or change how your future contributions are invested, or both. Most 401ks have simple tools to help you do this.

For most of us, an employer-sponsored retirement is the majority of our retirement assets. Spending some time once or twice a year to evaluate your account and your progress will put you in control of your financial life. You can do it - Smart Sister Finance can help!

Bridget Jones, Founding Sister