Make the most of your 401(k) — you’ll need it

Last week, Massachusetts Secretary of State William Galvin launched an inquiry into companies that pay 401(k) matches in annual lump sums, a practice that can cost workers tens of thousands of dollars in retirement savings compared with getting matches each pay period.

Galvin’s review also underscored another fact of working life: With the vast majority of employees relying on 401(k)s to finance retirement, the chance to boost those savings is more important than ever. Here are some ways suggested by financial planners to get the most out of retirement accounts.

Start early and save often

Financial planners stress the importance of preparing for retirement even when it is far out on the horizon. Even modest contributions to 401(k)s or individual retirement accounts made in your 20s will pay big dividends in your 60s.


For example, saving just 2 percent of a $35,000 salary, or roughly $60 a month, at age 25 with an average rate of return of 8 percent will result in more than $200,000 upon retirement. Contributing the same amount, but starting at age 45, will add up to just under $35,000.

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“If you’re setting aside 5 percent of your pay, just put it into an IRA or Roth to start saving,” said Lillian Gonzalez, owner of Gonzalez and Associates, a financial planning firm in Stoughton.

Consider a Roth option

An increasing number of employers offer both traditional, tax-deferred 401(k) plans and the option for a Roth 401(k). With a Roth, an investor pays tax on the contribution on the front end. The gains from the investment, however, can be withdrawn tax free at retirement.

Having some money in a Roth is a way to manage taxes after retirement. Retirees must pay taxes on withdrawals from traditional 401(k)s and IRAs, so being able to tap some savings tax free can reduce the hit. Financial planners call this tax diversification.

Roths can be particularly advantageous to younger workers whose earnings tend to place them in lower tax brackets and who have many more years for their investments to grow tax free.


“Math would dictate that in your 20s or 30s it’s better to be in a Roth,” Jeffrey West, a certified financial planner with Financial Compass Group in Wellesley.

Maximize the match

Many employers match employee contributions to 401(k)s up to an amount that generally falls between 2 and 5 percent of earnings. So if your employer provides a maximum match of 2 percent, then contribute at least 2 percent to get it. If it’s 5 percent, contribute at least 5 percent.

Getting that maximum match from your employer is the easiest way to increase the return on your retirement savings, financial planners said. Returning to the earlier example, if your employer matches your 2 percent contribution on a $35,000 salary, and you start to save at age 25, you will end up with almost $410,000, more than double the match-less haul.

It’s never too late to start

Older workers just beginning to save face bigger challenges in building sufficient assets to finance retirement, so they likely need to pursue aggressive investment strategies to grow their account.

The term “aggressive” might scare some older savers, financial planners said, but it essentially means contributing a larger portion of income to retirement accounts, putting a greater share of that money into stocks, or both.


“If you’re behind the eight ball and you’re starting out later in life, if you stay conservative you’re not going to see much growth,” West said. “You need to be more aggressive to give yourself even the possibility of catching up.”

Think incrementally

Most plans allow employees to adjust their contributions periodically. It’s a tool that allows employees to start small, but build their savings.

Financial planners say this approach can be more sustainable for many savers. For example, if your goal is 10 percent of earnings, you might start at 1 percent, and increase it by that amount every six months or a year until you hit that mark, said John McAvoy, a certified financial planner with Waterstone Retirement Services in Canton.

Consider all variables

Mandatory fee disclosure is a recent change to 401(k) plans, providing savers with more knowledge of their options when considering several plans. “High fees will erode returns,” West said.

In general, 401(k) plans with mutual funds that have low fees outperform those with higher fees, but savers should also consider the track record of individual funds, their risk profiles, and whether they are passively managed index funds, which track the performance of the broader market, or actively managed funds that try to beat the market.

A study by the Vanguard Group, a mutual fund company specializing in low-cost index funds, found that lower fees mean more money at retirement. Assuming an annual return of 6 percent, an investment of $100,000 with an annual fee of 0.9 percent would yield about $440,000 in 30 years. An investor putting that money in a fund with a 0.25 fee and getting the same 6 percent return would end up with nearly $100,000 more, or about $530,000 at retirement.

Sean Lavery can be reached at