Sexton Advisory Group’s Tips to Optimize Your 401(k)

Is your 401(k) in tip top shape? With over 20 years of personal finance and retirement planning experience as a financial consultant and CEO of Sexton Advisory Group in San Diego, CA, here are some of my practical tips on how to optimize your 401(k) — ultimately safeguarding one of your critical retirement vehicles for financial security in your golden years.

1. If your employer offers a 401(k) match, take it. If you’re in the market for a new job, prioritize potential employers that offer a 401(k) and matching program. Keep in mind that at most companies, you’ll need to be fully vested in the 401(k) plan to keep the employer match — which means you should plan on staying a couple of years until you’re fully vested. Every company has a different 401(k) policy, so make sure you know what you’re getting into in advance.
2. Don’t accept the default savings rate. When you sign up for a company’s 401(k) plan, the default savings rate is 3% of your paycheck that gets allocated to your 401(k). For many people, this might not even be enough for retirement. The goal is to save 1% more every year until you can allocate 20% of your paycheck to your 401(k) account.
3. Maximize your tax break. Your 401(k) allows you to defer paying income tax on money you save. In 2023, you can contribute up to $22,500 to a 401(k). After age 50, the limit goes up to $30,000.
4. Don’t cash out early. Early withdrawals will cause you to miss out on valuable compound interest that is essential for building a secure retirement. Resist the urge to cash out early — if you’re withdrawing before the age of 59 and a half, you’ll face a 10% early withdrawal penalty and have to pay income tax on the amount withdrawn.
5. Minimize fees. Some 401(k) investments have very high fees, which can reduce your balance over time. You should pick the lowest cost investment in your 401(k( plan that also matches your risk tolerance. If the fees are high, consider bringing this to your company’s human resources department to see if you can get your plan changed.