Is There an Optimal 401k Balance?

More on the topic of 401k saving: Can there be an “optimal amount” to have in a traditional 401k? At the very least, adjustments can be made to get close-to-optimal. And timing wise with the calendar approaching mid-year there is ample time (unless you have already maxed out your 401k) to make meaningful adjustments to your 2019 401k elections and start the optimizing process.

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This topic is especially important for those who take saving seriously and who have at least $400,000 TODAY in a 401k or IRA Rollover accounts combined with a 401k account. (For those with less, these concepts still matter but with less urgency.)

First: How old are you?

  • Age matters because TIME is one of the biggest determinants of how much a 401k balance can potentially grow.
  • If you are younger than 40, these concepts could affect you A LOT as the power of compounding can kick in over multiple decades (this does not mean trading; rather saving, allocating and allowing compounding to do its work).
  • If you are older than 60 and nearer to retirement or selling a business, these concepts matter greatly but the solutions will be slightly different.
  • If you are in your 50’s, a combination of strategies can work – and keep in mind the “catch up” that allows you to save more.

Second: How much – and HOW – are you currently saving?

  • The “how much” matters because saving needs to become a part of a person’s life if there are to be choices someday. Choices could range from retiring, to slowing down, to switching professions…to affording healthcare …to being able to travel more…to living where you want to be.
  • The “how” matters because the present and future tax treatment* of your savings will affect the choices you may have someday (see above).

Next: How much do you currently have saved? What about growth?

  • The $400,000 number mentioned above is not hard and fast but is an indicative level where, at current rates of potential growth coupled with future required withdrawal rates, a “tax danger zone” begins to come into play.
  • Future tax treatment of savings (after additions to savings over time plus any growth) matters a HUGE amount especially if rising taxes have not been incorporated into a person’s long-term financial plan.
  • Required distributions from Traditional 401k accounts and IRA accounts are taxable and thus increase future taxes (and healthcare expenses) in a BIG way. Ask me about calculating these amounts.
  • On the other hand, monies withdrawn from Roth 401k and Roth IRA accounts (and Roth IRA conversions) are tax-free. Note that taxes do need to be paid currently for Roth IRA conversions.*

Not considering Roth 401k and Roth IRA (and conversion) vehicles NOW can lead to unexpected tax bills someday that eat into retirement freedom. Talking with a knowledgeable financial adviser in conjunction with your CPA is the starting point. There may not be a perfect amount to have in a traditional 401k or IRA but optimizing your placement of savings today and over time can make a meaningful difference for your future.

*Consult your CPA or tax adviser for ALL tax advice.

 

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