December 2022
The Importance of Taking Advantage of Your 401(k) Plan
New Years is one of the most exciting times of the year. It creates a mental break in time, and in the process a new beginning. With the start of the new year, many will create resolutions or goals for the 12 months ahead. Many studies have been done regarding the effectiveness of goal setting (versus no goals at all) and the results strongly suggest intentional goal setting along with small actionable steps makes a huge difference in outcomes. In this post, we discuss financial changes anyone can make to improve their financial lives over the course of the year.
As mentioned above, the end of the calendar year is a great time to reflect and prepare for new beginnings. This new year may include an increase in pay. If this happens, no matter the amount, it may be a good idea to increase your retirement contributions. The max contribution you can make in 2022 is $20,500 (under 50). Not everyone can afford to put this much money into their retirement, but everyone can make it a goal to try and maximize their contribution based on their comfort level.
Another important part of contributing to your retirement is taking advantage of your employer's match program. Assume your employer offers a 100% match on all your contributions each year, up to a maximum of 3% of your annual income. If you earn $60,000, the maximum amount your employer would contribute each year is $1,800. To maximize this benefit, you must also contribute $1,800. If you contribute more than 3% of your salary, the additional contributions are unmatched.
If the company you work for offers to match your contributions up to a certain percentage of your pay, you should attempt to contribute that amount at a minimum. Contributing anything lower than the hypothetical 3% in this case is like throwing away free money. Not to mention that the employer’s match compounds in the same fashion as your contribution.
To illustrate the substantial benefit that a 401(k) plan typically provides, we’ll compare the growth of a maximum contribution to a 401(k) for 2022 against a taxable investment account. A taxable account is a non-retirement account and could be invested in a mutual fund or ETF. The example below does not include a potential match to your 401(k) contribution, so you could end up with even more retirement savings.
Say, for example, we plan to invest $20,500 in 2022 and withdraw our retirement savings in 20 years. Let’s assume a tax rate of 20%, and a growth rate of 5%. With these parameters in mind, our initial investment will result in an after-tax sum of $52,217. That’s more than 2.5 times our initial investment! A typical taxable account assuming the same growth and tax rates would only amount to a final sum of $43,514. In this case, we would be leaving almost $9,000 on the table if we chose the taxable account.
How much someone saves is ultimately a personal choice. Regardless of what you’re saving now, we hope you’ll prioritize putting away a little extra this year. The older version of yourself will be glad that you did.
For more information on Taxable vs. Tax-Deferred Savings visit: https://www.advisory-one.com/resource-center/investment/taxable-vs-tax-deferred-savings
Content in this material is for general information only and not intended to provide specific advice or recommendations, or a substitute for specific individualized tax or legal advice for any individual. We suggest that you discuss your specific situation with a qualified tax or legal advisor. No strategy assures success or protects against loss.