401(k) Checkup: Are You on Track?
For many people, a workplace retirement plan such as a 401(k) account is their most powerful tool for building future wealth. Not only is enrollment in such plans often automatic, but employers may offer matching contributions and investment choices that are designed to build a retirement nest egg.
But as you progress through your career, managing a 401(k) requires occasional check-ins to help ensure you remain on track as your income grows and your needs evolve. Here’s how to get the most out of your 401(k) at every stage of your savings journey.
Starting out—steps you can take in your 20s
Early in your career, time is your greatest advantage. Socking away even small amounts now can potentially grow to significant sums thanks to the benefits of compounding. Following a few best practices now can help you leverage your 401(k) to its fullest potential.
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Create an emergency fund
Before you begin saving for retirement, set up an emergency fund. A good target is keeping 3 to 6 months of essential living expenses in a savings account or money market fund as a cushion against unexpected bills or temporary breaks in employment. Once your emergency fund is in place, you can now begin contributing to a 401(k).
Build a strong foundation for your future
- If you have a 401(k) at work:
- Contribute at least enough to get your company match. That's like free money—don't leave any on the table.
- Combined with your employer match, try to save at least 10% of your salary each year. For example, if your employer will match 5% of your salary and you contribute enough to get the match, you'll reach the 10% threshold.
- Consider setting up automatic annual contribution increases of 1-2% per year, if available.
- If you don't have a 401(k) or similar retirement plan at work, consider other ways to save for retirement.
- When you're starting out, it can be common to change jobs more frequently. If you have more than one 401(k) account, review your 401(k) options when changing jobs for streamlining or managing those accounts more efficiently.
What’s a good savings target based on your current age?
Assuming you'll maintain the same lifestyle in retirement that you currently enjoy, you can estimate how much you should have saved by multiplying your current annual income and an appropriate multiplier based on your age.
If you're behind your savings target—take heart. Look for small steps you can take today. Review your budget and look for areas where you can cut spending and increase savings. Find opportunities to improve your retirement readiness.
Sample Savings Targets
Mid-career—reaching the next rung in your 30s and 40s
As your life progresses, you may be advancing into new roles and responsibilities at work, saving for a house, paying for childcare, or even helping aging parents. Despite these competing priorities, be sure to keep retirement front and center even as you care for your broader family.
Compound your retirement savings
- If you have a 401(k) at work, consider increasing your contributions by 1%–2% every year until you reach the maximum annual savings allowed.
- Even as other financial goals emerge, stay focused on retirement. For example, if you have kids who may attend college, prioritize your retirement savings before funding education savings accounts, such as 529 plans.
- Periodically review your savings and make sure that you can locate any prior 401(k) accounts.
Draw a map to your destination
With different goals vying for your attention, it's important to prioritize them. Creating a written financial plan can help you with that—as well as help you address any issues that could put you or your family at financial risk, such as gaps in insurance coverage.
Gaining traction—making the most of your 50s and 60s
Your final decade or two before retirement are often your highest-earning years, potentially allowing you to save even more for retirement than ever before. It's also the ideal time to create a more detailed retirement income plan with a financial professional, discussing ways to optimize your savings for maximum longevity.
Ramp up your retirement savings
- If you're already maxing out your 401(k), consider making additional catch-up contributions to give your savings an extra boost.
- Build up investments outside of your 401(k) plan in a brokerage account to give yourself more income and tax flexibility in retirement.
- Review your asset allocation as you get closer to retirement to help protect against major losses.
Plan to convert your savings into income
To explore options for generating retirement income, meet with a financial professional once a year or more frequently to fine-tune your retirement income plan.
Create the future you envision
Life throws us surprises. But our personal habits—automating our savings, increasing our contributions over time, and prioritizing saving throughout our working years—will define our long-term outcomes. Your 401(k) can be an important tool in your broader retirement toolkit, along with taxable investment accounts, Social Security, and other potential sources of retirement income. Get curious, review your 401(k) savings strategy at least annually, and take small steps at every phase of your career to help you move toward a more secure retirement. Your future self will be grateful you did.
Read next
Next article: Is an IRA Rollover Right for You?
Return to series homepage: Don't Ghost Your Old 401k.
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