Maximize Your Match: Celebrating National 401(K) Day

0:00 Welcome to Something More with Chris Boyd. Chris Boyd is a certified financial planner, practitioner, and senior vice president and financial advisor at Wealth Enhancement Group, one of the nation's largest registered investment advisors. We call it Something More because we'd like to talk not only about those important dollar and cents issues, but also the quality of life issues that make the money matters matter. Here he is, your fulfillment facilitator, your partner in prosperity, advising clients on Cape Cod and across the country. Here's your host, Jay Christopher Boyd. Welcome to Something More with Chris Boyd. I'm Chris Boyd, and I'm here with Jeff Perry and Russ Bahl, all of us of the AMR team, and glad to have you joining us.

0:43 If you're not a regular listener, you can find us wherever you like to listen to podcasts or by YouTube or going to our webpage at somethingmorewithchrisboyd.com. So today we are talking about National 401K Day. Who knew that there was a day to celebrate 401Ks? But it turns out, what, Jeff, it's the same day every year, huh? Same thing. Yes. Since 1996, when the planned sponsor, Council of America, created this Awareness Day, and it's the first, it's the Friday after the Monday, Labor Day holiday. All right. And that this year is the 5th and today, Friday.

1:26 And so we thought it'd be worth talking a little bit about some of the things to review when it comes to what should we know about 401Ks and 401K Day. So for those who aren't familiar with what is a 401K, or some, it's a form of employer retirement plan for savings toward your retirement. Money goes in, it comes out of your paycheck, essentially. It is pre-tax, so it avoids income tax. It diminishes your income in effect.

2:06 So it helps you with your this year's tax bill. Money grows tax deferred in there. And when you take it out is when you pay income taxes on it. People often think they'll be in a lower tax bracket when they retire. And so they like the idea of pushing off, deferring that income and having less tax later on. There are other benefits as well, right? And that is the likelihood that your employer may very well offer to give you some incentive to participate in your retirement plan by offering a match of some of your benefits.

2:47 So this can vary from employer to employer, how much, how readily. It's common for people to have some sort of initially maybe 100% match let's say an example might be 2%. Your first 2% of salary that you withhold to put toward your 401K, your employer will give you the same amount. You just made 100% rate of return on that money. Free money. Free money. It's like part of your salary you didn't know you were going to get. And if you don't participate, you miss out on. So you definitely need that. Now, sometimes an employer will say, and then after that we'll match half for the next 2%. So I get 3% if I'm doing 4% or something along those lines, you get the gist, hopefully.

3:33 So in any case, 401Ks have a great opportunity to help you make savings easy, retirement savings easy. And now there's not only the opportunity to traditional contributions, money going pre-tax to save and defer, and then eventually taxed on the way out. But you can also choose to do Roth in many 401Ks, depends on the plan. Not every employer has adopted this, but most plans today have the opportunity where you can choose if you want to pay the taxes upfront included in your income this year, but whatever that money grows into when you take it out is free from tax.

4:21 So that's pretty appealing as well. All right. Anything to start off? Who wants to jump in where I was throwing all that around? No, it's all very accurate. And I think most people have a common understanding of it. I was looking, I was wondering, what's the average 401K balance for someone? And of course, then you go down to, well, it depends how old they are, right? So Fidelity has some information on their website and they break it down by generations. And so the average Gen Z, which is the youngest generation that they have data for, has an average balance of $13,500.

5:01 They're young, they're just starting out. That's not bad. That's not bad. And maybe we'll talk about this, but the importance of starting young is so powerful in the retirement setting. Next up are millennials. I hear a lot about millennials. Their average 401K balance is $67,300. So climbing up there. Gen X, the average 401K balance is $192 ,300. And for the baby boomers, the average 401K balance is $249,300.

5:42 So that seems smaller than I would expect. Only because they're so close to retirement. And you need more. I agree. And when I saw the, especially the baby boomers number, I said, that can't be right. And then I started thinking about it. So this is the average 401K balance. So maybe I had a job from 25 to 45 and I had a 401K and I left and I rolled it over into an IRA. Right. So you're no longer in a 401K.

6:22 Right. And maybe I have a half a million dollars in that one for those 20 years. Right. And now I have this other job. Oh, that's a good point. Okay. I was thinking a little differently, but that's an excellent point. So I have a balance at this employer's 401K and then I leave it there while I go off to my next employer and build a new balance in that 401K. Right. So that decreases the average balance. I was thinking your point was, oh, well, baby boomers are getting into the retirement years and therefore they're rolling over their large balances when they retire into their own IRA.

7:05 So the average 401K balance is only those people who are working with ages, dates of birth between 1964, I think it is, and older, that kind of thing. So I don't know. Anyway, but the point about, hey, people have more than one employer and often don't consolidate their plans at their new employer, that kind of makes more sense to me. Yeah, I think so. Well, in any case, it's probably not quite sufficient to have 236 or whatever it was, $250,000. If you're close to retirement, you really want to be thinking about more.

7:48 There was something you said, maybe there's something we want to come back to. What was that? Let's come back to it. You have to tell me what it was. I don't remember. I don't remember now what it was, but it was something worth coming back to. Well, it'll come to us later. Before we started, I was sharing with you, according to the plan council of America- Oh, you were talking about compounding, the power of compounding. Oh, yes, I was. I was talking about it. It's so important. There you go. You get the first job and a lot of, just out of college perhaps, or maybe a little bit after that. And you get that first real job, a job that has benefits and such.

8:28 And somebody tells you to go to HR and fill out some forms. And you may not have really thought much about a 401k or any of this. You may have never been exposed to it if your parents or grandparents didn't talk to you about it. And you might choose, I'll do that later. I'm not ready for that. Or I don't know, and you take the paper or call and you never do it. But the importance of your long-term financial accumulation and success is so much more benefited by making those decisions early to sign up, put a contribution in that at least matches, at least is equal to what you get for the match. You gave the example of 2%. At least do, take the free money, right?

9:13 Absolutely. I mean, you're walking away, you're choosing to be paid less for your employment if you don't participate in the employer match at 100%, whatever that amount is. So in my example, you had to participate with 4% salary deferral in order to get 3% from the employer. The numbers may differ from one place to the next, but the point is if you don't fully participate to get all of the match, you are choosing to be compensated for less than you're eligible for. It's like saying, no, I don't need this month's paycheck.

9:54 Thanks anyway. Why would you do that? You're entitled to that. That's what the employer is saying. Your value to them is they want you to be fully compensated and they want you to be well-prepared for your retirement when the time comes. They're trying to incentivize you to be saving for retirement and take advantage of every aspect of that, just like you wouldn't turn away some benefit that an employer is providing. Why would you, right? So in any case, let's talk about just for a minute, the amounts you can contribute into this. So the first thing we're talking about there is the match, which is the free money part of it, but you have the opportunity to contribute amounts.

10:43 There are limits though, as to how much one can put into their retirement plan. So it's worth reviewing that. Russ, you got a few things there. You want to go over some of that? Yeah. So for employees under age 50, the contribution limit is 23,500 for 2025. That's per person. So pretty high limit there. You can hit that number, especially earlier on in your career, you're doing pretty well. Yeah. That's almost 2,000 a month, right? That's a lot of money. So that'd be great. A lot of colleagues I've had getting jobs out of school and that sort of thing, they think about their Roth IRA.

11:27 I don't know, for whatever reason in my generation, it is a popular investment option. We'll touch on that in a minute. I think that's a smart thing. So we can come back to that. Yeah, definitely. But I recently had a conversation with my brother and he was saying, I plan to contribute to my Roth IRA. I'm like, well, what about your 401k? He's like, oh, I thought it was one or the other. I didn't know it was all... So that could kind of come up too. There's separate retirement accounts that you can contribute to and each one has a different limit. Yeah, that's a good point. And when you have a available to you at work, that can affect the amount you're eligible to participate in for your IRA or whether or not you're eligible to participate in it.

12:18 And a Roth in that case. And income limits as well for a Roth IRA. Yes. Essentially, if you're doing a Roth IRA, once you exceed a certain level of income, I want to say it's around 146,000. Do you remember what the number is? 150, I believe. For a Roth. So for a Roth. Okay. Yeah. This is for a single person. Once you get to 150,000 and then you start to have a declining eligibility to do the full contribution because you make too much, air quotes.

12:58 And then at 165, you're fully phased out from being able to contribute anything to a Roth because you have your other work plan available to you. But keep in mind in that instance too, your brother, I think you said, may have the opportunity for a Roth contribution at the work plan. So the IRA only allows you in that case to under 50 to do $7,000, but you could be doing 23,000 into the Roth. That's what he really wants to do if he has the availability of a Roth plan for the 401k plan.

13:40 But just quick on this topic of Roth traditional, maybe we can give some brief guidance as to who should consider which and when. Do you want to weigh in on that or either of you want to weigh in on that? Go ahead, Russ. Well, I think for, especially for high earners, there is a appeal to the tax treatment of a traditional 401k where the money is going in pre-tax and you just less income that you have to pay on. So especially during their earning years, the traditional 401k has a lot of appeal.

14:22 I would think when income is lower, maybe earlier on in your career, a Roth 401k could be a better option. Yeah, I totally agree. So early in your career when you're probably not making your peak earning income is a great time to think about this. Additionally, I would argue that people who are in the highest income tax brackets, why not? They're already in the high income bracket. They're probably not going to see a reduction in income tax bracket when they're retired, just because they're likely to be having a high income even in retirement.

15:02 And then you could argue that tax rates are relatively low and maybe it's a good time to be choosing to pay that tax if you have a higher propensity for substantial income later in life as well. So yeah, you get that dichotomy on the low end of income, on the high end of income, probably good times. Why argue? Do both. You can do both in a 401k in many instances. You can allocate funds to the traditional and to the Roth. And ideally when you reach retirement and you're in that decumulation phase, it's great to have both types of accounts so you can better manage your taxes.

15:45 You can decide what accounts you're taking from, you can decide which accounts are better to leave to heirs. So I like both. No, I, yeah, I agree. That's a good, good call. When it comes to the contribution limits, going back to that. So we have the opportunity to do $23 ,000 in 2025. So there's still time if you haven't been planning to max out your 401k, if you have the ability to do that, there's still time to talk to your HR, get your payroll structured where so much is going to your plan. But if you're over 50, 50 and over, there's a catch-up provision.

16:32 You want to, so 30,500, is that the number these days? 31,000, I believe. 31,000. Okay. Sorry. So you've got that. And there are different numbers for different types of plans, but yeah, 31,000 is the number for that now. And then it gets more convoluted if you're in your 60s. There's a little window of period of time where you have some additional amounts that you can do. There's a couple of places where there's little nuances.

17:13 So if you are looking for help on that, that's probably, if you're in that window of age range, it's probably worth talking to someone to get the particular details because it's changing at different stages of your, in your 60s when you can and can't do more than these numbers. In any case, try to max it out is the point. And you're, by the way, your employer, your HR department, your 401k team, wherever they do the 401k, they will also be able to give you details of what's my number at my age.

17:58 Okay. So if you need help, that's another possibility. When it comes to 401k, there's a lot of reasons people choose to do the 401k. One is the simplicity of it through payroll deduction. The other, and it's somewhat out of sight, out of mind, it helps. The other is usually the employer is, as a fiduciary is expected to be vetting for some decent investment options and they should give you a range of offerings. Today, it's very common for employers to be opting for these target date approaches.

18:38 It's somewhat becoming less frequent where you have the opportunity to sort of do your own selection of funds. It's not to say that it's not available, but it's becoming less frequent. It's much more common for plans to be really focusing on a target retirement date structure where it's intended to be an asset allocation design that is available to you. Some of these are better than others and you don't have as much control of these. This is probably a topic for another show, the life cycle funds and target date funds and some of the strengths and weaknesses that these offerings have.

19:22 For most people, there's usually a little more international than they might typically select themselves. There are some that are just index-based. There are some that are more manager-based, some that will do a composite of multiple managers. So it can really vary in the way these are structured. The biggest problem, quote unquote, that I see with people that we speak with and such is that they don't know how they're invested. They go that first day as I described and go in and they fill out their forms and there's really no personal advice. They might be given a paper with choices or a website to visit, but there's no due diligence done on behalf of the employee and saying, how does this fit into my financial plan?

20:12 Do I have other things? Is it consistent with my own risk tolerance? What's my time horizon? And so forth. And sometimes, they make good decisions or they make simple decisions or they don't make bad decisions, maybe the best way to say it. And sometimes they do. We've seen people come in with 401ks that people have been contributing to for long periods of time and they're in a very conservative type cash preservation setting and they missed the opportunity for some growth that they would have had if they had sought some counsel. And you can see the other end of the spectrum, with people who have kept all in these high risk and now they're getting close to retirement and saying, is this a good idea?

20:58 And they're maybe taking an abundance of risks that might be right. Questionable as well. So that's a great point. This is the kind of thing that's best done with a little bit of guidance and counsel and conversation, context of your overall plan and not to just ignore it, which I think is often the case. And as we talked about earlier, it's very common for people to have an employer plan that they have at one place and then just move on to the next one and not really give much attention to the one that they had a decade ago or whatever it might be. And it needs some consideration and review and revision from time to time.

21:41 And it could be, let's say you didn't do a target date fund in that original 401k when you first started working. That might be at a very different allocation than you would want 10, 15 years later at this new job. And you kind of forget about it and it's all equity. It's all tech stocks or whatever it might be. So yeah, it's easy to kind of forget these little nuances with 401ks especially. Well, right on topic with one of the things that 401k day is about and one of the things that they're suggesting that people do is to consider consolidating the old accounts, if you will, into whether it's an IRA or another 401k and do some homework about what their asset allocation should be in that consolidated account.

22:31 So we're right on target with one of the reasons that we're having. It's a great reason to have it and to think about it is to maybe give some attention to those old accounts and whether to keep them where they are or to make a change of some kind, whether it's into your IRA or into your 401k. This is again where the context can matter. What's going on with the rest of the plan might help you identify what's the right answer for that question. How soon will you be retiring? How soon will you need the money? We have clients sometimes who say, I think I'm thinking of making a loan against my 401k.

23:13 Is that a good idea? Are there other alternatives as to where to do that? Pros and cons, things to be discussed, but sometimes you have that availability of borrowing from your 401k. However, it does diminish your earning capacity, the performance expectation. People often think, well, I'm just paying myself back and that has appeal, but it also does impact your compounding and your rate of return from that experience. There's trade-offs that need to be considered and then what are the alternatives?

23:55 Absolutely. One of my favorite things that I like to talk about with people is to increase your contributions on some period. We talked about when you're young, get started, at least do the match. Get involved, do the match, start your process. This applies to everyone, but when you get a raise annually, you get a review, you change jobs, whatever it is, whenever something happens positively, bump that up 1%. Just keep increasing your annual contribution. Easy way to do it. You get a 3% raise, 1% goes to your retirement plan, 2% goes to your cost of living.

24:39 Absolutely. The truth is none of us miss that 1%. No matter how tight your budget is, it's typically that you don't even miss it. That's a great way to keep increasing that benefit, that little bit. Each time you get a bump in pay, just allocate a portion of it to the savings. Oftentimes, when you're setting up the 401k in the first place, they have an option. It says, do you want to increase this by 1% each year? It's an easy way when you start to just have that go on without really thinking about it. Big picture, 401k or 403b or simple IRA, whatever retirement plan you have at work is a great resource to take advantage of.

25:26 It's going to help you to be better prepared for retirement and to do that savings you need to do. When it comes to as the amounts grow, as you go through the period of years, it's time to get some counsel in the process periodically. You may want to talk to your financial advisor, your financial planner. It's certainly something we talk to clients about routinely in the context of what else is going on in their financial plan. If you need any help, don't hesitate to reach out to us. Hopefully, we can be a resource to you. Thanks for being with us. Until next time, keep striving for something more.

26:37 Transcribed by https://otter.ai Readers should consult their own financial advisors or conduct their own due diligence before making any financial decisions.