Beating the average doesn’t have to be difficult.
A 401(k) can be one of your best options for retirement savings. With its high contribution limit, tax advantages, and potential for a company match, it could be your biggest source of savings once you retire.
But the average person had just $232,710 invested in a 401(k) at age 65 or older as of the end of 2022, according to data from Vanguard. The median balance, which may be more representative of the typical retiree, was just $70,620.
While markets recovered in 2023, likely sending the average 401(k) balance higher, many Americans will find their 401(k) wanting if they reach retirement with an “average” balance. Even when you add in Social Security income and other sources of retirement savings, that level of 401(k) savings is going to make it difficult for many to retire comfortably.
The good news is you can do better than average if you follow these three simple strategies.
1. Always get your company match
There’s no better return on your investment than ensuring you get the company match in your 401(k). Most companies offer one, and they will typically match dollar for dollar or $0.50 on the dollar for contributions up to a certain percentage of your salary. It’s hard to beat an immediate, guaranteed 50% or 100% return.
Contributing the base level necessary to get your full company match will put you well on your way to achieving a 401(k) balance that eventually surpasses the average retiree’s. If you’re lucky enough to start in your early 20s, you’ll find your savings start to add up quickly when your employer is pitching in.
It’s also becoming easier for workers to get their employer match thanks to the SECURE Act 2.0. Starting this year, 401(k) plans can offer employees a matching contribution for paying off eligible student loans. So, even if you’re just entering the workforce with a ton of debt, you could still get your match while responsibly paying down your loans if your employer offers this benefit.
2. Save a percentage of your future pay raises
If your 401(k) plan offers you the chance to “Save More Tomorrow,” you should opt in.
The essence of the plan is simple: You commit today to saving a portion of your future pay raises in your 401(k). You make the decision one time, and it happens automatically whenever you get a raise. It’s a very effective way to increase your savings rate without feeling the pain of giving up a bigger piece of your paycheck in the vague and distant future.
If your 401(k) plan doesn’t offer an automated contribution increase upon receiving a pay raise, you should try your best to make the changes yourself. Commit today to saving a certain percentage of your pay raises. Then, contact HR whenever you get a pay bump with the new amount you’d like to contribute.
Using this technique has proven extremely effective in increasing savings rates among 401(k) plan participants.
3. Keep your fees low
One of the biggest drags on 401(k) balances are fees.
The biggest fees in 401(k) plans are often the investment fees charged by mutual fund companies. You should aim to avoid actively managed mutual funds with high expense ratios. Instead, opt for a low-fee index fund if your 401(k) plan offers it. Index funds historically outperform actively managed mutual funds when you account for the fees paid to fund managers.
It might be worth paying a fee to use a self-directed brokerage account if your plan offers this option, and it doesn’t have any good index fund options. A self-directed account allows you to invest in a much broader set of securities, and you can likely find an index fund that charges just a few basis points. Depending on the fee, it might be worth paying to access more investment options.
Don’t underestimate the difference a few basis points can make. A fund that charges 0.5% more in fees than a comparable option producing the same returns before expenses will have a deleterious effect on your 401(k) balance over 20 or 30 years. Just as compound interest can work for you, it can also work against you when you’re the one paying it.
If you follow these three strategies, you could find your 401(k) balance steadily surpassing the average retiree’s. But don’t stop there. Keep saving so you can ensure you retire with a nest egg big enough to truly enjoy your golden years.
