Investment Ideas, Retirement Planning, Uncategorized

How 401(k) Plans Work: How to Save More Than Your Peers

401k plan

For many Americans, the 401(k) plan is the bedrock of retirement planning.  More than 100 million Americans are covered by these plans, with $11 trillion in assets. 

It’s important to understand how these plans work, how the employer match works (if there is one), what the contribution limits are, and how important it is to start participating early, even if you can’t afford the maximum allowable amount.

Participation in 401(k) plans

401k plan

According to the U.S. Bureau of Labor Statistics, 68% of private industry workers had access to retirement plans in 2021, but only 75% chose to participate.  The data is better for employees of state and local governments, where 92% could participate, and 89% chose to do so.

The first step toward saving more than your peers is electing to participate in a 401(k) plan as early as possible, assuming your employer offers one.


The employer match

Employers who sponsor 401(k) plans are not required to match your contributions, but many do.

A matching contribution means the employer deposits funds in your 401(k) account to “match” your contributions up to a certain threshold.  Employers can set a vesting schedule, which requires you to stay employed for a designated period before you can access the matching funds.

While there are many formulas for the employer match, a common one is $1 for every dollar you contribute, up to 3% of your compensation.

The impact of an employer match on your 401(k) account can be substantial.  According to FINRA, a dollar-for-dollar match or up to 3% of your salary over 35 years will double your savings, even assuming no increase in the value of your investments, which is highly unlikely.  

How does 401k work?

401k plan

Tax benefits

Contributions to a 401(k) plan are made with pre-tax dollars.  You are not taxed on these contributions or the employer match until you withdraw money from your account.

The amount of your contributions also reduces your taxable income for each year you contribute.

Contribution limits

In 2023, you can contribute a maximum of $22,500 to your 401(k) plan, subject to cost-of-living adjustments.

If the 401(k) plan permits, participants age 50 or over at the end of the calendar year can also make catch-up contributions of an additional $7,500 in 2023, subject to cost-of-living adjustments.

Average savings by age

401k plan

According to Vanguard,  the average and median account balances in defined contributions plan by age are the following:

The “median” is the number where half of the numbers are lower, and the other half are higher.  Meanwhile, the “average” is the total of all the numbers divided by the number of items in that set.

How do you stack up?

Tips for beating your peers

401k plan

Start early

It’s impossible to overstate the benefits of participating in your 401(k) plan early.  Here’s why:

  1. You’ll have a longer time for your investments to grow and benefit from compounding.
  2. At a younger age, you can take more risks with your investments.  Riskier investments like stocks have higher expected returns over the long term.  As you age, you can be more conservative with your investment choices.
  3. You may be able to retire earlier because your retirement earnings have more time to accumulate.


Here’s an example of how starting early can impact your retirement savings.  According to Kiplinger, a 30-year-old who saves $1,000, with a hypothetical 5% compound annual return to age 65, will accumulate 60% more in savings than someone making the same contribution at age 40.

If the two people had saved $1,000 each year, the 30-year-old would have almost doubled ($95,836 vs. $51,113) when they each turned 65.

The lesson is clear:  Start saving for retirement as soon as possible.

Understand your investments

Since the Great Depression, stocks have had average annualized returns of 9.59%, compared to 5.59% for bonds.

No one knows what the future returns of stocks and bonds will be, but based on historical returns, a portfolio more heavily weighted towards stocks will have a higher expected return than one weighted towards bonds.

If you want to beat the savings of your peers and are comfortable with the risks (which can involve stomach-churning ups and downs), consider investing more aggressively (higher percentage of stocks), especially in the early years of savings.  As you age, you can make your portfolio more conservative.

A competent financial advisor can assist you with all aspects of your portfolio, including asset allocation between stocks and bonds and global diversification.  However, you will be limited by the choices available in your 401(k) plan investment options.

Contribute more

Many experts recommend saving between 10% and 20% of your gross salary, but that doesn’t necessarily mean it should all be invested in your 401(k) plan.  Remember, when you withdraw funds from your plan at retirement, they will be taxed at your marginal tax rate at that time.  No one can predict what that will be.

A prudent approach may be to invest the minimum necessary to receive the maximum employer match.  The balance of your savings can be contributed to accounts with a more favorable tax impact upon withdrawal, like a brokerage account or a Roth IRA.

You can find an exhaustive list of investment accounts available to you here.

Saving More With 401K

If you want to track your progress against a benchmark, it’s helpful to see how your account value compares to others in your age group.

In addition, if you follow these recommendations, you have a good chance of beating the amount most of your peers can save in their 401(k) plan.

Know more about retirement planning and the options you can explore through Allied Integrated Wealth.

Let us help you create a comprehensive, customized financial plan.

Related Posts