How to Make the Most Out of Your 401(k) in 2022

Daniel Penzing
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Max Out the Employer Matching Contribution

One of the biggest benefits of contributing to your 401(k) is your eligibility for your company’s match. We wish, however, that matching was the status quo for all plans. Matching not only increases the amount you can save, it’s also a clear sign of how serious your company is about encouraging its employees to save.

If your company offers matching, make sure you contribute enough to take full advantage of it. Some companies cap the amount you can earn, some limit the percentage they match and others require a minimum number of years before you are eligible for a match.

A simple trick to help you easily meet these requirements is to start with a lower monthly contribution. Use our 401(k) calculator to determine how high you need to set your contribution in order to take full advantage of your company’s matching contribution. Then, increase this amount gradually while keeping your employer happy.

Max Out Your Annual 401(k) Contribution

A 401(k) plan is a type of retirement plan which allows employees to elect to defer a portion of their pre-tax income into an investment account that will be invested in a selection of mutual funds, stocks, bonds and other instruments. This is done on a pre-tax basis, which means that deductions are made from each paycheck before taxes are calculated. When someone participates in this way in a 401(k) plan, he or she is said to be making pre-tax contributions.

In addition to making pre-tax contributions, an employee may also have the option to invest amounts in his or her 401(k) account beyond the annual limit that would otherwise be applicable. This additional amount must be made on a post-tax basis, which means that the employee does not receive the benefit of a pre-tax deduction and that taxes are calculated on the amounts at the highest income tax rate.

Participants who want to make post-tax contributions to an employer-sponsored 401(k) plan must first check with the plan administrator. Different 401(k) plans have different contribution limits, and the specifics regarding limits, eligibility, and deadlines must be adhered to if a participant wants to make such contributions in a given year.

Maxing Out Your Contribution and the Effect on Your Employer Matching Contribution

Make the Most of Your Investment Funds

If you are one of those people of working age then you must surely be saving a part of your income for retirement. As compared to the previous generations, the young generation is really considerate about saving for the future and a major part of their salary is contributed to various retirement plans like a 401(k) plan. Although it can be difficult to manage different accounts with data entry and then paying the bills every month, these plans can be very useful if managed correctly with some smart tips.

How the Mix of Funds in Your Plan Affects the Final Value

Typically, the type of funds offered by your 401(k) plan come in two flavors – actively managed funds and index funds. The former rely on a professional to select stocks and bonds based on their anticipated performance, while index funds rely on a quantitative analysis of the stock market.

It’s easy to assume index funds will always outperform self-selected stocks, but that’s often not the case. The S&P 500 indexs have a 3.4% average annual return in the last 20 years compared to average annual gains of 5.3% from actively managed funds.

Riskier investments like actively managed funds do have the potential to earn more money, and they also outperformed the index in 2008. However, the risk does not always pay off. In fact, the opposite may be true.

In periods of low stock performance, like 2009 and 2011, index funds outperformed their managed cousins.

Lowballing Risk

As many 401(k) plan participants discovered in 2008 and 2009, the impact of the stock market on your retirement fund can be severe. The current Federal Reserve rate of 0.50% is extremely low, resulting in declining stock markets and higher risk of market losses.

How to Make the Most Out of Your 401(k) Plan by Getting Professional Help

Analyzing Fund Fees

In general, the fees for 401(k) plans will vary based on the mutual funds your employer chooses to offer in the plan. While many mutual funds have great long-term returns, any fees charged on top of that can have a big impact on your earnings.

One way you can begin is by analyzing the fees that are associated with the mutual funds your employer has selected for their plan. You can find this information in the 401(k) plan document, or by contacting the plan administrator.

Some mutual funds charge transaction fees, while others charge annual maintenance fees and/or administrative fees. Fees will vary based on the mutual funds within your plan, as a higher fund might be better for investment growth and long-term compounding, and less expensive overall. You can also get a sense of the fees that each of your mutual funds charge (which are often the highest fees within the plan).

For example, you can use Morningstar’s Fund Screener tool to see all of the fees associated with a fund. You can also use this tool to compare fees, as some funds might offer the same investment though with lower fees.

You should look at this information and think about which of the available mutual funds might be the best fit for you.

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Creating the Right Asset Allocation with the Right Funds

When it comes to your 401(k), there’s a lot to consider. You need to be able choose what your contributions will be, find an investment plan that’s right for you, and choose which investment options you will have access to.

That’s a lot to figure out, but it’s also important to consider some other factors, such as how to make the most of your 401(k) in 2022 to benefit you in future years, where saving money now will provide the highest benefit in the future, and how to use your investment options to get the best long-term returns.

The 401(k)’s investment options in its own right, while useful, are somewhat limited. Don’t have enough in your account to make a much larger investment? Don’t worry – some robo-advisors will help you.

Take Blooom for a Test Drive

While a 401(k) might seem straightforward at first glance, it can be tricky to navigate especially if your account isn’t very large. You have to figure out how much money you’re putting in, the frequency of investment and add the appropriate stock advice.

But let’s be real, few of us have time to sit down at night and study our 401(k) accounts. And, if you happen to be a millennial, a survey found that 27% of you don’t even have a 401(k) account nor do you plan on opening one.

That’s where Blooom can help. Blooom is an investment advisor platform specifically designed to manage retirement accounts such as 403(b), 401(k), and IRA. Blooom not only manages your account, it does it at a fraction of the cost savings you can expect to see. Blooom works with 10,000+ companies in the U.S.A. The number one reason that most people abandon their 401(k) plans is because they don’t feel like they can manage it themselves. Blooom changes that.