By Eric Reich
I have heard a lot of people talking lately about their 401(k) and how much they “hate” it. They complain that it’s down (because the market as a whole has been down), and that they have limited choices, etc. I certainly understand all of those concerns, and no, a 401(k) isn’t a pension like the good old days used to have, but what I always try to stress to investors is that they should love their 401(k).
First, what is a 401(k)? A 401(k) is an employer sponsored retirement plan that allows you to defer a portion of your salary up to a maximum amount of $22,500 or ($30,000 if you are 50 or older) in 2023. See, there is a benefit to being over age 50. These contribution limits index with inflation. Funds can be accessed after age 59 ½ unless you meet certain exceptions or financial hardships. When you put money into your 401(k), those deposits are made pre-tax unless your plan allows for Roth 401(k) deposits. This can help lower your overall current income tax liability. Your 401(k) while sponsored by your employer, isn’t an asset of theirs, it’s yours and yours alone. If you leave, you can take it with you or if your employer goes bankrupt, etc. it will not affect your account at all. Best of all, many employers match a portion of your 401(k) contributions. A 401(k) match is a free return. Always try to contribute up to at least the limit of your employer’s match to maximize your contributions. Here are some additional ways to help get the most out of your 401(k).
1. Start early. Many of you reading this already understand the importance of starting to invest early, but perhaps your children or grandchildren do not. Investing just $500 per month for 40 years assuming an 8% return grows to over $1.600,000. Wait 10 years and that number drops to a little over $700,000. Wait 10 more years and now it’s a little less than $300,000. The key here is don’t wait. Even if you have to start by investing less, something is better than nothing and it will still grow over time.
2. Down markets can be a good thing for those actively contributing to a 401(k). While we all hate down markets, those that are contributing to a 401(k) may be buying more shares each time they make a contribution since the share price may be down. This can be a huge help for your retirement account once the market returns to where it was and eventually rises even higher.
3. Stay invested. Too often I see investors stop 401(k) contributions in a down market or get very conservative too soon before they retire. If you have 5 years to go before retirement, in most cases, you should be fully invested in the market. There is likely no reason for a 25-year-old to be conservative in a 401(k). If you have enough time horizon, the markets will eventually correct themselves and you’ll be glad you stayed in the market. Using the $500 per month example from earlier, the $1,600,000 at 8% drops to around $960,000 at 6% and under $600,000 at 4%. That’s potentially a million dollar difference just by staying invested in the market. Those that have the courage to stay the course when things are scary are often rewarded handsomely for it.
4. Roth is the way to go for younger investors. Yes, you don’t get a tax deduction for the contributions, but you get all of that money tax free on the back end when you take it out. If you aren’t in a high tax bracket, then the deduction might not be all that important to you anyway.
In the end, a 401(k) is a great tool for helping accumulate wealth. Not participating in your company’s 401(k) even if they don’t match is a huge, missed opportunity to help grow your wealth.
Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Reich Asset Management, LLC is not affiliated with Kestra IS or Kestra AS. The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. To view form CRS visit https://bit.ly/KF-Disclosures.
Eric is President and founder of Reich Asset Management, LLC. He relies on his 25 years of experience to help clients have an enjoyable retirement. He is a
Certified Financial Planner™ and Certified Investment Management AnalystSM (CIMA®) and has earned his Chartered Life Underwriter® (CLU®) and Chartered Financial Consultant® (ChFC®) designations. A lifelong resident of Cape May County, Eric resides in Seaville, NJ with his wife Chrissy and their sons ,CJ and Cooper, and daughter Riley.
