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Of the many ways to save for retirement, the 401(k) is an important tool. But is it enough to help you meet your retirement objectives? This article explores considerations with an employer sponsored 401(k) as well as other options that can help you save enough for your future.
Everyone wants a comfortable retirement, but the road to get there will depend on your specific situation. Investors assume a certain level of risk (but everyone hopes that their holdings will increase in value).
One of the most challenging aspects of investing involves matching tolerance for risk with investment objectives.
How much money is needed for retirement? It’s important to take the time to project the amount of money needed. While setting aside a percentage of income in a 401(k) is an important step, chances are that most people will need more than current saving limitations allow. Many investors supplement their employer-sponsored retirement benefits and Social Security income with personal investments. In order to develop a fitting plan, first consider the goals.
In 2026, the contribution limit for a 401(k) is $24,500. For workers age 50 or older, they may save an additional $8,0000 (for a total contribution of $32,500). And employees who are age 60-63 can contribute an additional $11,250 above and beyond the $24,500 contribution. While the contribution limitation often increases in future years and the employer may match contributions above this limit, the question is whether the employer-sponsored plan allows for saving enough? If an employee can, increasing savings now may help with retirement later.
One question for an investor to consider is comfort level with investment risk. Investments may be aggressive, moderate, or conservative. The best option is dependent in large part on the investor’s stage in life, as well as financial resources available. Risk tolerance will most likely change over time.
Aggressive investors tend to have a longer time frame—with as many as 35 years or more to save and invest until reaching retirement—and therefore, a greater capacity to withstand loss. For example (the following percentages will vary greatly by investor and their definition of the terms aggressive and conservative investments), stocks may account for 85% of a relatively aggressive portfolio, compared to 40% for a more conservative portfolio. As investors near retirement, their asset allocation strategies generally change to account for lower risk tolerance and an emphasis on income over growth.
With a 401(k), the employee may be responsible for managing the portfolio, not the employer (although sometimes there are options for Target Date Funds (”TDFs”), which shift investment risk from more aggressive to more conservative funds as the targeted date approaches). While one aspect of a retirement savings plan is investing for the long term, it is still important to stay involved and adjust as needed. Choosing to be an active money manager rather than a passive investor can help with maintaining the appropriate allocation strategies to achieve long-term goals.
Keep in mind that it may be important to diversify within asset categories. For example, spread equity investments among large-cap, mid-cap, and small-cap stocks, as well as vary fixed-income investments with different types of bonds and cash holdings. The diversification strategy in a 401(k) should complement investment strategies used outside of the retirement plan.
Because retirement plans offer tax benefits, they carry certain restrictions, such as when withdrawals can be made without penalty. While funds in a 401(k) are made with pre-tax dollars and have the potential for tax-deferred growth, withdrawals made before the age of 59½ may be subject to a 10% Federal income tax penalty, in addition to ordinary income tax.
Today, some 401(k) plans offer a Roth 401(k). If an employer offers this option, employees may be able to designate all or part of their salary deferrals into a Roth account.
For those looking to save specifically for retirement, in addition to a 401(k), consider a Roth IRA, which allows earnings to grow tax free. While contributions are made with after-tax dollars, withdrawals are tax free if certain requirements are met. Talk with a trusted advisor for additional details.
Taking advantage of retirement accounts and their tax benefits is a valuable strategy but also consider building more liquidity and flexibility into your overall savings and investment plan. In the event you need access to funds before retirement, have a contingency plan such as an emergency cash reserve and relatively liquid investments. It’s important to keep in mind, however, accessing savings in the short term might impact long-term goals. In looking toward retirement, consider increasing overall savings, maintaining appropriate asset allocation and diversification strategies, and planning for taxes. Over time, investments will inevitably be affected by legislative reform and market swings, but with a long-term outlook and continued involvement, you are better positioned to manage the fluctuations and changes in order to achieve your objectives. Finding a trusted financial advisor can help keep you on the right path.
