There's no shortage of advice about how to invest your 401(k) funds in order to grow your wealth. The problem is what works for one person doesn't always work for the next. Your retirement timeline and risk tolerance, along with your plan's options, determine your best path forward. But there are still a few moves that make sense for almost everyone.
As a freelance writer, I don't have access to an employer-sponsored 401(k). But if I did, I would make sure to do this one thing every year to help my savings grow as quickly as possible.
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Don't leave free money on the table
One of the biggest benefits a 401(k) can offer is the opportunity to earn a 401(k) match annually. This is money your employer contributes to your 401(k) on your behalf for you to use in retirement. It's essentially a bonus, but you only get it if you contribute money to your account first.
Every company that offers a 401(k) match sets its own formula that dictates how much you receive. Most commonly, you'll either receive a dollar-for-dollar match, where your employer pitches in one dollar for every dollar you contribute, or a $0.50-on-the-dollar match. In either case, companies usually cap your total match at a certain percentage of your income.
Leaving your match on the table means missing out on that money, so it's generally not a good idea unless you truly cannot afford to defer any of your paycheck toward retirement. Skipping it might not seem like a big deal now, especially if your match is only worth a few hundred dollars, but its true value is much greater.
Say you make $40,000 per year and you qualify for a dollar-for-dollar match on up to 4% of your annual income. That means if you contribute $1,600 to your 401(k) throughout the year, your employer will put $1,600 into your account as well, giving you a total of $3,200. If you claimed this match every year for a decade, now you're looking at $32,000 just between your contributions and your employer's. But your actual balance will likely be a lot higher.
Remember, your 401(k) funds are usually invested in securities, and these fluctuate in value over time. Losing money is a possibility, but often, people grow their wealth over time through investing, especially when looking at a longer time frame.
You could wind up with over $48,000 after 10 years if you earned an 8% average annual rate of return on your personal contributions and employer match. And that assumes you don't contribute anything beyond the minimum required to earn your match. That, coupled with Social Security, could easily pay for a year or two of retirement expenses for a lot of people.
How to make the most of your 401(k) match
Those who aren't familiar with their company's 401(k) matching formula should reach out to their HR department or 401(k) plan administrator to find out more. Once you know how this works, you should be able to calculate how much you need to save during the year to get the full match. Divide this by the number of pay periods remaining in 2023 to figure out how much you need to set aside per paycheck.
It's also a good idea to inquire about the company's vesting schedule if you haven't been there long or are thinking about leaving soon. This determines when employer-matched funds are yours to keep if you leave the company. Ideally, you can stick it out until you're fully vested so you don't lose any of the money your company gives you for retirement.
What to do if you don't get a 401(k) match
Unfortunately, not all employers are willing or able to provide a 401(k) match to their employees, but that doesn't mean you shouldn't contribute to yours. It can still be a great place to stash money for retirement thanks to its high contribution limits. You can set aside up to $22,500 here in 2023 if you're under 50 or $30,000 if you're 50 or older.
But it might not be your best move if you don't like the investment options your 401(k) offers. When there's nothing that matches your risk tolerance or all the options charge high fees, you may be better off saving in an IRA or health savings account (HSA). You can always return to your 401(k) later if you max out these other accounts.
It's possible to save enough for a comfortable retirement without a 401(k) match, but if you're offered one, it's in your best interest to claim it if you're able to do so. Even if you aren't able to take home the entire thing, every dollar you are able to contribute will help you out in the future.
