Maximizing your employer’s 401(k) match
A beginner’s guide to balancing income needs with retirement savings
Summary
- Contribute as much as possible to your 401(k) to build long-term financial security.
- If you can’t afford 10% to 15% of your pretax salary, aim to contribute up to the amount of your employer’s match.
- There are several ways beyond your 401(k) to boost your retirement savings with the help of a financial advisor.
Saving early for retirement
Early in your career, retirement planning can feel daunting—or even unnecessary. Life at 70 isn’t exactly top-of-mind for most twentysomethings, after all. But there is one simple choice you can make now that your future self will thank you for: Maximize the employer match on your 401(k), 403(b) or equivalent workplace retirement plan. Even while managing day-to-day expenses, it’s crucial to prioritize this long-term investment. To help you do so, here are answers to common questions aimed at helping early-career professionals.
What is a 401(k) match?
An employer’s 401(k) match is an added contribution that effectively boosts retirement savings at no extra cost to you. If your employer provides a 50% match on up to 6% of your salary, this means for every dollar you contribute to your 401(k) up to that limit, your employer adds an extra 50 cents. Because the match is essentially “free money” that gets invested in a tax-deferred account, taking full advantage of it is one of the most important things you can do to secure your financial future. In the example below, 25-year-old Alicia’s $2,400 employer match would be worth over $50,000 by the time she turns 70, assuming a 7% average annual return. (Behold the power of
How does 401(k) matching work?
Should I max out my 401k contributions?
Contributing as much as possible to your 401(k) is crucial for building long-term financial security. Aim for at least 10% to 15% of your pretax salary, including the employer match. But don’t worry if that seems high—even contributing up to the amount of your employer’s match can make a big difference.
What if I can’t afford to contribute the match amount?
Do what you can! Write a list of your fixed expenses, like housing and healthcare, and flexible expenses, like dinners out and vacations. If all that amounts to your whole paycheck, see what you can scale back to better secure your future. And remember that contributing $100 a month to your retirement plan on a pretax basis may mean only $70 or $80 comes out of your paycheck (depending on your state, tax rate and other variables).
How else can I increase my retirement savings?
Beyond your 401(k), there are several ways to boost your retirement savings over the long term, including these:
Brokerage accounts: These investment accounts provide flexibility for contributions and withdrawals. While they don’t offer the same tax benefits as retirement accounts, they do have their own tax advantages. For instance, the tax rate you’ll pay on realized, long-term capital gainswill likely be no more than 15% , whereas those same gains when withdrawn from a traditional IRA would be taxed at your regular income tax rate—which is probably higher than your capital gains rate.Diversified investments: Broaden your investment portfolio with a mix of assets—such as stocks, bonds and real estate—across all your investment accounts to manage risk and potentially increase returns.- Income diversification: To ensure a steady stream of income during your retirement, consider complementing stocks, bonds and mutual funds with strategies that offer guaranteed income, such as fixed annuities.
Individual retirement accounts (IRAs): If you’ve reached the maximum limit for your 401(k) contributions, consider contributing additional funds to an IRA.Financial advice: As your financial needs evolve, consult a financial advisor for help with building a tailored financial plan and for ongoing advice on the expected and unexpected changes in your life.
Are you on track for a secure retirement?
Creating a secure financial future starts now. Small, consistent steps can significantly impact your success, but each person’s path is unique. At TIAA, our role is to help guide you through every step of your personal financial journey.
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