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Retirement Calculator: 6 Important Tips from a Financial Advisor to Get The Most Out of Your 401(k)

401(k) funds are one of the most common funds among the retirement-saving public today. Many people enroll haphazardly through employment benefits and it’s not until we start creeping towards retirement age that it can start to get more attention. With the right approach and information, there are ways to make your 401(k) work for you and your retirement lifestyle.

By Nancy Zambell
My parents and many of their contemporaries didn’t have to worry too much about saving for their retirement years, since many of them were covered by defined benefit plans funded by their employers. So, other than the financial advisors, the 401(k) was not even part of the mainstream retirement lexicon. And at that point, never part of the retirement calculator.

How times have changed! Fewer and fewer employees are that lucky today. Instead, most of us are solely responsible for funding our golden years. Fortunately, Uncle Sam has provided several vehicles, in addition to social security, that make it easy to save—and, sometimes, they come with significant tax advantages.

And 401(k) funds are one of the most common funds among the retirement-saving public today since its inception less than 50 years ago. Many people enroll haphazardly through employment benefits and it’s not until we start creeping towards retirement age that it can start to get more attention.

With the right approach and information, there are ways to make your 401(k) work for you and your retirement lifestyle.

But first, it’s important to know how one works.

The 401(k) is a defined contribution plan, a savings and investing plan, that Congress created via the Revenue Act of 1978. In this type of plan, the individual makes contributions, deducted from your paycheck—on a pre-tax basis—according to a stipulated formula. And then your employer may elect to match part or all of your contributions—in essence giving you free money.

The contribution limit was raised recently to $19,500. If you are age 50 or over, the catch-up contribution limit is an additional $6,500.

The “all sources” maximum contribution (employer and employee combined) is currently $58,000. And plan participants who contribute to the limit can receive up to $38,500 from match and profit-sharing contributions ($58,000 minus $19,500).

One of the best attributes of the 401(k) is this: because your contributions are on a pre-tax basis, you are not taxed on them until you begin to withdraw them—ideally upon retirement, when your tax rate will be smaller than during your working years.

And since your contributions are deducted from your paycheck, contributing becomes automatic. Think of it as a forced savings plan, in which you don’t spend it because you don’t see it!

Avoid a stagnant 401(k)

401(k) plans are tremendous savings vehicles, but unfortunately, they are not often used to their maximum abilities. Here’s why:

Most 401(k) plans are underfunded, usually because folks think they can’t afford to sock money away. If you fall into this category, you are making a big mistake. Chances are, you won’t even miss those pre-tax dollars coming out of your paycheck. An easy way to do this is by consistently and immediately increasing your contributions by a portion of any raises and bonuses you receive. Hey, how can you miss it if you never had it?

Additionally, most employers offering 401(k) plans at least partially match your funds, and that amounts to free money! Add in the beauty of compounding interest—i.e. making interest on interest—and before you know it, you have a real retirement account.

It’s understandable that when you first open your 401(k) you may be unsure about the level of your contributions. So, if you don’t think you can afford much, start with just 1% or 2% of your income. Then make a commitment to increase that rate every year until you hit the maximum amount.

Once you’ve decided how much to invest, your next step is to choose among the investments your employer’s plan offers, which will usually be an assortment of mutual funds and Exchange-Traded Funds (ETFs). And that requires a bit of effort on your part. Your employer will most likely invite the plan administrator in to give you an overview of the plan, but you will need more assistance than that.

And don’t forget—your plan need not be stagnant. As you become more used to directing your own retirement funds, you may find that you will want to change your investment strategy from time to time. Fortunately, most 401(k) plans are now set up to accommodate those changes.

Make your 401(k) work for you

I want to caution you about two common scenarios that will adversely affect your ultimate goal of a sunny retirement.

Make sure you roll your funds over when you change jobs. Many folks who change jobs make the mistake of taking the cash out of their 401(k) plans. This is a terrible idea! One, you’ll probably spend it on something you don’t need. Worst of all, when you get the money in your hands, you have just subjected yourself to significant early withdrawal penalties as well as hefty income taxes. And that doesn’t even address the opportunity cost of losing the ability to compound the returns on that money you just withdrew.

A better idea: Roll the money over into your new employer’s plan or into an individual IRA that you can set up easily at your bank or brokerage firm.

Don’t borrow money from your 401(k) unless it’s a dire emergency. Because: 1) You’ll have less in the account compounding for your future; and 2) you may find it hard to pay back the loan and keep contributing at your current rate. If you absolutely need money, look for other loan alternatives. But keep your retirement out of reach!

If your company offers a 401(k) plan, my advice is to contribute as much as you can to it, consistently. You’ll be amazed at how quickly the funds can build up over time.

Here are 6 tips for making the 401(k) process more successful for you:

1. Know what you’re actually planning for

In my time working as a financial advisor, the most asked question was, how much money do you need to retire comfortably? Unfortunately, that’s the wrong question to ask.

The real question to ask, especially as you mull your 401(k) plan, is:

What does your ideal retirement look like?

Retirement comes in many shapes. Some retirees like to travel non-stop, and others want to spend time at home with the grandkids. It’s this last one, lifestyle, that’s one of the most significant factors in planning retirement, and also one of the most difficult factors to project.

Another consideration is at what age do you want to retire? Retiring early means you’ll be retired longer, which requires more money.

Where do you want to live? Moving could change your living expenses and impact how much savings you’ll need. What about your lifestyle?

People like to think they know what’s coming. They’re usually wrong. People also like to think they know what will make them happy. Again, they’re often wrong. Think about all the people with college degrees designed for careers they no longer want.

Our desires might change. The best we can do is to plan for what we know and over-prepare. Begin thinking about the different things that will add to your expenses. Accounting for everything is a challenge, but with each added item, you get closer to reality as retirement costs can compound quickly.

There’s cost of living. Unfortunately, you’ll necessarily need to leave this vague. The ambiguity makes it harder to plan for, but not impossible with a little bit of research. If you know where you want to live, that will help you plan for your monthly and annual living expenses. If it’s hot, for example, you’ll be using more electricity for air conditioning. Don’t underestimate any possibilities.

Too often, people plan for lower costs because they think they’ll be at home making dinner every day. That gets boring. Most people will go out a lot. Whether that means day-trips or vacations, it almost always involves eating out regularly. Eating out raises your cost of living in a hurry, and that’s only one added expense of your new activities.

There are family considerations. Your family members are the most important people in your life. You’ll jump to help them without thinking twice. Unconditional love is a beautiful sentiment, but it can become a financial burden. The only guarantee is that anything could change. As siblings, parents, and grandchildren grow older, their circumstances change the same way yours do.

There is no telling when or if somebody close to you will have an emergency. The ideal outcome is that nothing comes up, then whatever money you set aside can be spent on yourself or saved for the next generation. Hope for the best, of course, but plan for the worst. At least that way, you aren’t caught unprepared.

There’s all the renovations and improvements. You live with your home every day, and you may decide you want to make some improvements or install new kitchen cabinets or renovate that first-floor bathroom. Like with planning for family events, if you don’t create a separate fund for these possibilities, you will dip into your standard of living for these expenses.

As with every other pot of money and source of income, you want to over-prepare. It is better to have too much money and a choice of what to do with it than not enough money and a choice of what you’ll have to give up.

By no means is this an exhaustive list of considerations for retirement expenses. Instead, it is a glimpse into the costs you might not be thinking about. It is difficult and may be impossible to consider everything, but trying to tally your needs guarantees that you’ll be on the road to the retirement you want.

2. Know your safest 401(k) options

People crave safety; it’s a basic human necessity. Having a surplus of money is an ideal way to create that safety. But when it comes to building that surplus, some risk is often required. As for the safest 401(k) investment options, perceived safety can come in many forms.

Finding a place to stash your money might seem like a good plan, but is not as safe as you think. With inflation eating away at the value of your money, if you’re not compounding that value, you’re actually losing value.

Of course, playing a game of high risk and high reward has its own set of dangers. When seeking the safest 401(k) investment options, there are a few directions to go.

Risk and reward are an inseparable part of investing in the stock market. The degree to which you can find safety depends on the strategies you are trying to implement and your behavior in the process. When beginning your 401(k) plan, look for these:

Management fees

No matter what kind of fund you decide on, the most direct path to finding safety in your gains is through finding a fund with low management fees. Funds describe their management fees by a percentage. The fee percentage often appears low and may seem negligible, but each tenth of a percent can make a difference in thousands of dollars in the way your investment grows over time.

With two funds behaving mostly the same and one having significantly larger management fees, you can expect to have more money over time by investing in a fund with the lower management fees.

It is essential to state that a lower management fee does not result in poor fund management. Vanguard, a firm with a reputation for low fees, is one of the most respected and trusted mutual fund companies.

Aggressive Growth Allocation

If you have a lot of time before retirement, the aggressive growth strategy is often promoted. Even when the stock market is volatile, stocks trend in an upward direction given enough time. Even with recessions, the market recovers to a higher point than it was previously. This is why new market highs and records are never quite as impressive as they’re made out to be in the media.

The steady upward trajectory makes aggressive allocations appealing to people with a lot of time to invest. Be that as it may, the safety of these investments is genuinely dependent on the amount of time you have to invest. Aggressive funds are the most likely to experience dramatic drops in value, and you must endure those uncertain times to see all the growth down the road.

Value funds

Value funds can be some of the safest 401(k) investment options. Where aggressive funds aim for considerable growth, value funds look to invest in the safe bets that are currently trading lower than they should be.

Value investing is modeled after the strategies of Benjamin Graham and Warren Buffet. While they do not aim for the quick massive gains of aggressive funds, it is hard to argue with the growth results that these and other successful investors have found.

Value funds look to invest in stocks with high dividend yields that are trading below what the company is worth. The main principle in value investing is that stocks are not always priced appropriately, and plenty of stocks can be found at a discount to their real value.


The market has rarely ever taken money from investors. What does take money from investors is their fear when they take money out of the market after a crash. Whenever you take your money out of the market, you are locking in gains or losses depending on whether the market is up or down.

Patience is key. If you are investing money that you need to take out soon, that’s the first mistake. Investments should be made with a long-term plan in mind. The safest thing you can do is to avoid investing with money you are going to need soon.

3. Understand the Different Retirement Plans Available to You

As someone who wants to invest for retirement, it is important to realize that different retirement plans are not created equal, so it’s important to know the differences to choose wisely.

For many of us, trying to understand the world of investing can be like trying to learn a new language. You’ll find acronyms and terminology that no one else uses, not to mention charts that don’t seem to make much sense. Luckily, you don’t need to understand every part of it to put a plan in place that will set you up for a comfortable retirement. In fact, you really just need to know the basics of the different retirement plans available.

Of course, it’s always nice to learn more, but it’s also important to get started. Retirement will be here before you know it, and you don’t want to put off your retirement investing.

So it is important to take the time to discover the different retirement plans you could get. The best part about these different retirement plans is that you most likely only need to understand one of them. Each is available only to certain types of employees, so you’ll never have to worry about the others unless you switch to a job that offers one, or your significant other has one, and you combine your finances.


The 401(k) is the most well-known of these plans. Available to employees of private companies (if they offer it), the 401(k) is available to millions of workers in the world’s largest companies.

The 401(k) takes contributions directly from your paycheck before taxes. This means you’ll contribute more to your plan, it will grow more efficiently, and you won’t be taxed until you make withdrawals.

Self-employed individuals and small business owners can also use a type of 401(k) called a Solo 401(k) to take advantage of the tax incentives included. You can make withdrawals from your 401(k) at age 59 ½ without penalty. Before that, any withdrawal will pay any additional 10% fee aside from the taxes due.


A 403(b) plan is similar to a 401(k) with some notable exceptions. The primary difference is in who it is available to. 403(b) plans are only available to workers of a non-profit, school district, religious group, or government organization

The plans often provide fewer and more conservative assets to invest in. Most typically, these include mutual funds and annuities. There are also some advantages to how these plans vest, but some 401(k) providers may have beneficial vesting plans as well.


The 457(b) plan is an option for state and local government employees. Employees fund the plan with pre-tax dollars just like with the other plans but can withdraw funds before the age of 59 ½ without paying a 10% fee on their money.

If you are looking for the same tax treatment as a 401(k), think about IRAs as retirement plans too. All of the plans mentioned above are useful and effective tools, but they’re all specific to certain forms of employment.

IRAs, on the other hand, are available for anybody with earned income. A regular IRA operates with the same tax treatment as a 401(k). A Roth IRA is funded with after-tax dollars and therefore is not taxed when withdrawing money.

Employer-sponsored plans could also have Roth options available, but they are rarer to find. Whether or not an employer offers Roth plans, an employee could still open a Roth IRA and fund it with their earned income.

4. Self-employed? Go solo.

Don’t have any full-time employees working for you? It might be time to look into Solo 401(k) providers to find out about this unique retirement plan designed specifically for self-employed individuals.

Basically, the Solo 401(k) is designed for people who work for themselves and don’t have others working for them, not including business partners or a spouse that helps with some tasks

Before you look for a provider, however, it’s important to understand the advantages and disadvantages of these plans.

One of the biggest concerns for self-employed individuals is the ability to save enough for retirement. Employed people often have more help and guidance in making the right moves for their future.

Even if there is not as much help for self-employed individuals, there are still plenty of options that they can work with. The Solo 401(k) is one of the best.

There are reasons people choose to work with Solo 401(k) providers. The Solo 401(k) works similarly to a traditional 401(k) with a few distinct differences. Besides the obvious fact that this is specifically for self-employed people, there is also the advantage of having the opportunity to choose the way your money is taxed.

You can opt for a traditional Solo 401(k) that offers tax deferral. This means your money won’t be taxed going into the account, and you will have more money in the account for growth. Alternatively, you can use a Roth Solo 401(k) where the funds deposited into the account get taxed immediately as regular income. The tax advantage of a Roth is on the withdrawal where no additional taxes come out of the growth you’ve had through your investment.

Above all else, one of the best reasons to work with a Solo 401(k) provider is the experience you get. Working with someone that knows what they’re doing can give you confidence and take a burden off your shoulders. Running a business already takes a lot of energy. Working to figure out your investments on top of that work may be too much. Having experience in your corner can give you a significant advantage without a huge time commitment.

Some people choose options other than Solo 401(k) providers. An IRA and Roth IRA are both available to anybody with earned income. If you’re not looking to invest through retirement accounts beyond what these vehicles allow, a Solo 401(k) can be more than you need.

Having the freedom to decide how you are taxed is enormous. Many people think about how their money is growing, but neglect to think about the way they’re being taxed. Your taxation has many implications on the best and most efficient ways to withdraw and use your money. Still, other vehicles can provide you with this taxation flexibility.

A quality non-direct recognition life insurance policy with a strong company, for example, can be a great way to develop a tax-free asset over time. Still, each vehicle has its advantages and disadvantages, and others might work better for your situation.

5. Small business owners should also consider the Solo 401(k)

A 401(k) is widely regarded as an essential component of a successful retirement plan. The problem is that most people think you need to work with a large company to have them. While anybody with earned income can open IRAs and Roth IRAs, rarely do we consider a 401(k) for small business owners.

Running a small business has plenty of perks. It’s also a lot of work and finding creative ways to invest can be time-consuming. There is good news. The Solo 401(k) can also cover small business owners who qualify.

This financial vehicle allows small business owners to build a valuable asset to take care of them and their family when the time comes to exit their business life. Some business owners don’t plan to stop working. Still, a 401(k) for small business owners can at least afford them the option of a comfortable retirement.

It helps for small business owners to learn how to invest in a 401(k). The immediate hesitation might be figuring out how to invest in a Solo 401(k) for small business owners. People working for a large company have the luxury of having much of the enrollment process for their 401(k) practically automated for them. Still, this can also be a disadvantage as many people have no clue where the money in their 401(k) is going or how it’s performing compared to other options.

So, while there is a little more effort required for small business owners, this can also be seen as a slight advantage since they’ll better understand where their money is going and what it’s doing.

The most important step in creating a 401(k) for small business owners is deciding who will establish and maintain the plan for you. You could do this on your own, but that will take up a lot more of your time. Working with a financial institution will take a lot of work off your plate, give you strong guidance along the path, and take off much of the load of doing the 401(k) plan on your own.

As a small business owner, there are mistakes you can avoid while investing in a 401(k). Some business owners make a mistake in not understanding how the 401(k) works to their advantage. As the owner of a business with a Solo 401(k), you would be eligible to contribute both as the employer of the business and as an employee of the business.

Combined contributions of these roles mean you can contribute a maximum of $57,000 per year (excluding any potential catch-up bonuses). Contributing as an employer or an employee alone would not include many potential contributions and, therefore, you could loose out on a lot of the potential growth from your retirement savings.

Working with a professional will help ensure you don’t make the mistake of missing out on potential contributions.

6. Understand the pros and cons of early withdrawal

While a 401(k) early withdrawal can make sense for investors, it is best to know how the process works before you decide to make a withdrawal.

One of the most frustrating aspects of a 401(k) retirement plan is the length of time you need to wait before withdrawals. 401(k) early withdrawal fees can eat away at the gains you’ve made and eliminate meaningful growth from your account. Still, that doesn’t exactly mean it’s never a good idea.

The minimum age for 401(k) withdrawals without penalty is 59.5. Especially for young investors, that can be a long time to wait for your money. Under the right circumstances, taking the penalty can make sense, but you need to understand both the penalties you will incur and the benefits you’ll get. Without that, you simply can’t know if you’re making the right decision.

401(k) Early Withdrawal Penalties

Whenever you take money out of any investment vehicle, there is a downside. When the government has a vested interest in your money being in said vehicle – getting more in taxes and having independent retirees – you can be sure there are some extra penalties to the action.

Surprisingly, there is only one formal penalty in the case of a 401(k) early withdrawal.

10% IRS penalty

A 10% extra tax is the only literal penalty from an early withdrawal. If your withdrawal does not meet any of the requirements for an emergency withdrawal or loan, there will be an extra 10% tax imposed on your withdrawal.

It is essential to understand that this rate is in addition to your original income tax. So, an early withdrawal of $10,000 will have an additional $1,000 of taxes due.

Standard income tax

Yes, any withdrawal, whether early or not, is considered income. Money put into a 401(k) is tax-deferred – unless you have a rare Roth 401(k) – and will be taxed when you take cash out.

Since an early withdrawal may mean that you’re taking this money while still working, this increases your taxable income and may push you into a higher tax bracket.

Vesting schedule

Depending on how long you’ve been with your company, all of your money may not be available to you. The vesting schedule refers to the amount of the employer’s contributions that you have a right to.

All contributions of your own money are always 100% vested, but employers have a right to require an amount of time with the company before you gain a right to their contributions. This means that you may not have the available funds that you think. If you are not 100% vested in your 401(k), the entire balance of your 401(k) is not yet yours.

401(k) Early Withdrawal Benefits

There are loopholes. If you have a genuine emergency, several exceptions allow you to use a 401(k) early withdrawal without any penalty at all. Some circumstances include first-time home purchase and medical emergencies. Even if you don’t fall into one of those categories, you might be able to use a 72t, which allows for a series of equal payments over several years.

Another option may be to take a loan from your 401(k), but not all company plans allow this.

Get money when you need it

The most apparent advantage is access to your money if you need it. Of course, it’s not all of the money that you might have had if you didn’t need to make an early withdrawal, but at least you have an opportunity to take care of whatever issues you needed the money for.

Better places for the money

You may come across an opportunity that would be a better place to use your money. For example, perhaps a fantastic real estate deal comes across your plate, and you need another $10,000 for closing costs. Paying that $1,000 penalty could very well be worth it in the long run if the deal is as good as you think (make sure of this before executing an early withdrawal).

Not sure what to make of a 401(k) early withdrawal? As is the case with most things, there are pros and cons to an early withdrawal. The simple solution is to do your homework and be certain of what you’re getting from withdrawing your money early and if it’s worth the penalty.

If you don’t do your due diligence, you can be almost sure you’re losing money somewhere. Remember, it always helps to consult a professional to cover all your bases.