We all want more money, especially in our retirement accounts. But how can we maximize our retirement accounts to make more money? In episode 44 of the Retire Right podcast, I was joined by Paul Merriman, a nationally recognized authority on mutual funds, index investing, asset allocation, and both buy-and-hold and active management strategies to cover a topic everyone should be thinking about: 401(k)s.
To help you make the most out of your 401(k), Paul shared 15 ways you can make more money so you not only have more for your retirement, but also have more to leave behind for your loved ones.
Read on to find out 15 ways you can make more money in your 401(k) plan.
1. Start as early as possible.
When you’re young, you have one of the most amazing assets: time. So, prioritize getting started as early as you can, even if it means asking mom and dad for a loan. If you have a child that’s younger, you don’t have to wait until they’re in the workforce to help them get started. You can set up a Roth IRA for them for around $6,000.
2. Save more
This one may seem obvious, but saving even small amounts can make a big difference. Even adding just 1 percent more a year will lead you to having more money to spend later in life. If you get a raise, that’s also the perfect time to increase the percentage you’re putting away until you reach your maximum.
3. Take advantage of the Roth in your 401(k)
If you can, use a Roth. Why? Because you never know if you’re going to retire in a high-tax environment. As a spend later guy, Paul also favors the Roth because it forces you to save more money and is a great estate planning tool to leave your kids and family members money where it might hopefully provide tax-free distributions.
4. Pick up the free money — no matter how much it is
If you’re walking down the street and spot some money on the ground, how much would it have to be for you bend over and pick it up? A dollar? Twenty? While many have their threshold for what’s “worth” bending over to pick up, Paul says: pick up the free money! And that’s what you should be doing with a company match — take advantage of it and make sure that your absolute minimum is growing. Every hundred dollars that you put away a year can be worth $45,000 later in life.
5. Go for higher risk
Some asset classes do better over the long run — not because there’s something magical about them, but because they’re riskier. Academic research has told us that smaller companies who are out of favor as a group have produced the best long-term return of all the major asset classes. For young people who have 40 years of time on your side, the odds are in your favor if you can put money away in equities for the long-term.
6. Diversify your asset classes
Whether it’s the S&P 500, indexes of small companies, real estate investment trusts, or international assets, when you put together a portfolio and do it right, Paul says you should have somewhere between 8,000 and 120,00 companies in a broad range of asset classes. Why own so many? Because you can’t depend on any one of them to give you the best results.
7. Don’t be too conservative
It’s natural to want to protect yourself against bad times. But the reality is, when the market goes down, you have an opportunity to buy more shares at a lower price. It’s not a penalty, it’s a reward for having done things right for your retirement accounts. For younger people, the long-term risk is extremely low and the reward is high. Even in your 50s and 60s, to outpace inflation and to have some growth, you need to be sure you’re not being overly conservative.
8. The power of the target date fund
If you're investing in the best of them, target date funds do what almost every investor wants. It makes a decision just as if that target date fund was your pension fund, it knows how old you are, and it starts putting what they consider to be the appropriate amount of equity, fixed income, and U.S. and international into your fund. While not every target date fund is alike, they do take care of your money for you for the rest of your life.
9. Coordinate with your spouse’s 401(k) investment options
Do you know what benefits your spouse has through their 401(k) plan? Your spouse’s plan may have features yours doesn’t offer, and vice versa. If you work together as a team, you can make the most of both your plans to maximize your savings.
10. Boost your returns by investing in value funds.
When you can, choose low-cost index funds instead of actively managed mutual funds. According to studies, index funds usually outperform about 90% of all actively managed funds in any given asset class.
11. Go with intermediate-term government bonds
When investing in bond funds, Paul recommends choosing to invest in intermediate-term government bonds, especially those with low expenses.
12. Say goodbye to underperforming asset classes
Paul recommends you do yourself and your future a favor by getting rid of any asset classes that don’t have a long history of beating the S&P 500 — including gold funds, bitcoin, and other similar asset classes.
13. Don’t borrow from your 401(k) plan
Your 401(k) plan isn’t a resource you can just dip into whenever you’d like. Unless it’s a real emergency where there is absolutely no other option, don’t borrow from your 401(k). The cost of doing so is so high, you will most likely regret doing it in the first place.
14. Borrow money from your parents
When you’re in your 20s, it could be worthwhile to borrow money from your parents, perhaps with a low-interest loan that you can pay back over time for your initial IRA contributions. Then, because you’ve invested the money from the start, you’ll be way ahead right off the bat.
15. Work an extra five years before retiring
Why put off retirement? Because with just five extra working years, you could effectively double your retirement income. Why? Because your portfolio will have fewer years to pay you out, plus you’ll have a lot more money saved.
To hear Paul’s breakdown of his 15 401(k) plan ideas, be sure to tune into episode 44 of the Retire Right podcast. If you have any questions, be sure to reach out to me or Paul at https://paulmerriman.com/.