Maxing Out Your 401(k) Isn’t Enough Anymore — Here’s What to Focus on in the New Year

If you’ve been making the maximum contributions to your 401k with a set-and-forget kind of mentality, you may think you’re well ahead in the retirement game. Undoubtedly, making contributions to your 401k is always a good move. But that alone may not be enough for most folks by the time they enter a traditional retirement age (let’s say in one’s mid-60s).

Indeed, 401k nest eggs can grow to become pretty sizeable if one makes the maximum contribution and gets a match from their employer. That said, for many of today’s young people, employee matches just aren’t in the cards. And if there’s no match, contributing as much as you can into your tax-deferred 401k may not even be the best course of action. For young folks just kicking off their careers, the expectation is that one will pull in a fatter salary a few years down the road. In such a case, the 401k may not be the magic solution to achieve a rich retirement.

I’m a bigger fan of contributing to the Roth IRA over the 401k if your employer isn’t going to match even a small portion of the money you put in. Either way, diversification across accounts strikes me as a must for just about everyone as they proceed with their retirement journeys.

It’s not all about the 401k

In any case, I believe it makes most sense to expand your horizons by contributing to a wider range of accounts. Heck, in some instances, putting extra savings in a non-registered brokerage may make more sense, given the financial flexibility over stashing cash away in a 401k for the long haul. Just like diversifying investments is important, diversifying across accounts is also a smart bet. 

At the end of the day, your 401k account is just one of many accounts that can help construct a retirement ideal for you. Essentially, the 401k is just one pillar (of what should be many) holding up your retirement nest egg. With more pillars and a smart asset allocation strategy (contact a certified financial planner for this), you may be able to give your retirement plans a bit of a shot in the arm.

So, if improving upon your retirement gameplan is a part of your New Year resolution, do make an effort to reach out to an advisor to make sure you’re not neglecting other pillars (think the Roth IRA and other accounts) that should also play a pivotal role in holding up your retirement plan.

Are you ready for a stock market downturn?

If you’re like many set-and-forget types of investors, you’re probably investing your 401k proceeds in some mutual fund comprised of equities and bonds. Either way, these are “risky” assets that could exhibit increased volatility come the second half of the 2020s. The good years for markets certainly do not last forever. And, as we witnessed during 2022, bonds can also take a big hit to the chin despite their reputation as a relatively “safe” asset. 

As such, investors should ensure other parts of their portfolio (beyond the 401k) are ready to take advantage of those market corrections, sell-offs, and, of course, crashes. Timing the market is a losing proposition. However, by ensuring ample liquidity, one won’t be caught with their pants down come the next market pullback.

Perhaps having a bit more cash in a high-yield savings account (HYSA) or Treasury bills (T-Bills) beyond what you’d need in emergency savings (around three to six months’ worth of living expenses saved in cash) can be a good idea so that you’ll have cash to spend when stock valuations fall flat and the bargains come to be. Regarding passive income producers (think coupons from bonds, interest from savings, distributions from REITs, or dividends from stocks), your Roth IRA is an invaluable tool that should be leveraged.

The bottom line

In short, investors should shoot to save and invest above and beyond their 401ks. Whether we’re talking about Roth IRAs or non-registered HYSAs, there are major benefits to staying diversified across asset classes and account types. After another big up year for markets, I’d argue extra prudence in non-401k accounts may be worth looking into. As always, see a financial pro to ensure your retirement roadmap is in good shape to kick off 2025!