Seventeen Ways to Make More Money in Your 401(k)

For many people, a 401(k) retirement plan is their biggest source of retirement savings. Unfortunately, most people don’t use their retirement funds to the best advantage. Here are 17 ways you can get more benefit from your 401(k). Most of these tips also apply to an IRA, a 403(b), and other tax-deferred savings programs.

1. Save as early in your working life as you can.

If you can manage to put $6,000 a year into a 401(k) or IRA for 5 years while you are in your 20s, that could mean an extra $2 million by the time you retire. Besides giving you an extra $2 million in income, this could add $5 million to your estate.

Don’t believe those numbers?

Consider the difference just a few years can make even with a very small amount of money. Let’s assume you put away $1 per day for a newborn child for 21 years, and then the savvy child decides to finish what Mom and Dad or Grandma and Grandpa started and continues the commitment until age 70. To make the computation simple, I will assume the investment of $365 is made at the first of each year, and because it makes sense, that you put the money into the S&P 500, where the historical long-term return has been about 10%. You are likely to be long gone by the time the child checks the final value at retirement, but it’s possible the $25,550 investment would be worth almost $2.9 million at age 70.

But what if Mom and Dad or Grandma and Grandpa didn’t get around to setting up the account until the child was 10? The cost is hard to believe. Waiting 10 years and not putting away the additional $3,650 in deposits would have left the child with a little more than $1.1 million—$1.8 million less. Oops!

2. Save more.

Increasing your savings rate by 1 to 2 percentage points every year will make a huge difference in the long run. I suggest you put it on your calendar to make the annual adjustment so you don’t forget. Most experts suggest getting your commitment up to 15% to 20% of your income by the time you reach age 35.

3. Take advantage of the Roth variations of your 401(k) and IRA, especially in your early working years when you may not be in a high tax bracket.

Although it’s tempting to make a tax-deductible contribution, most of us spend our tax refunds on things we won’t even remember a few years later. But if I had had access to a Roth 401(k) in my working years, I would have put every cent I could into it, even though it meant I wouldn’t get a big tax refund.

In the early days of my career, the highest marginal tax rate was 70% to 90%, and it’s possible we will be there again. I also know that a Roth is one of the best ways to leave money to the next generation. Whatever the tax rate, I am certain that when you retired (retire), you would be pleased to have tax-free income from your savings.

4. Whatever else you do, be sure that your contributions to your retirement plan are enough to get the full benefit of your company’s matching funds.

After that, if you have more money to invest, what you do might depend on how good your company’s investment options are. If they leave out some important asset classes (more on those below), then you can put the next dollars into an IRA.

Of course, after you have invested to the max in your IRA, you can move back to complete what you can afford to save in your 401(k).

5. Don’t be too conservative, especially when you are young.

In your 20s, 30s, 40s, and even your early 50s, most of your investments should be in equities. What few investors realize is that with every additional 10% of your portfolio in equities, the portfolio should earn another one-half of 1 percentage point per year. And that is a very big deal, especially for young investors.

6. Based on the last 91 years of hypothetical returns, you should boost your returns by investing in value funds.

The Large Cap Value (LCV) Index has added more than 1% per year over long periods. For the 91 years ending in 2018, the LCV compounded at 11% compared to 9.7% for the S&P.

A more meaningful number for an investor is the average 40-year return for the 1928–2018 period. The average 40-year annualized return was 10.9% for the S&P and 13.5% for the LCV.

7. Add as little as 10% in Small Cap Blend (SCB) for an extra $1 million in retirement spending.

For the 91-year period ending in 2018, SCB compounded at 11.9%, and the average 40-year return was 13.8%

8. Don’t overlook the life-changing impact of adding a small amount of Small Cap Value (SCV).

The gold ring of asset classes is the SCV Index. For the past 91 years, SCVI compounded at 13.1%, and the 40-year average was 16.2%. Why should SCV produce so much more return? Academics would say the big premium comes from the combination of both the small and value asset class premiums.

Now, let’s get one thing straight. No one knows what any asset class will make in the future. Ninety-one years of evidence seems meaningful, but the outcome might not be as good as you expect in the years you invest. From 1975 through 1999, the S&P compounded at 17.2%. At the end of that amazing period, investors had a very high level of confidence that this trusted asset class would continue its climb. In fact, surveys taken in 1999 and 2000 found that investors were expecting returns of over 20% a year for the next decade. From 2000 through 2009, this “trusted” index fooled everyone and fell at a rate of about 1% a year, and twice it fell by more than 50%. For the entire 20-year period ending 2018, the S&P compounded at less than 6%.

9. You can smooth out the volatility of your equity investments by adding some other asset classes that have a long history of
generous returns.

For example, real estate investment trusts (REITs) have slightly higher historical returns than the S&P 500, and—perhaps more importantly—they often move contrary to the direction of the S&P. You will also get some important benefits by adding international large-cap blend funds, international large-cap value funds, international small-cap blend funds, and international small-cap value funds. To top it off, you should consider adding a small amount of emerging markets.

10. Whenever you can, choose passively managed index funds because they are likely to make more than actively managed mutual funds.

Over many 15-year periods, the SPIVA (S&P Versus Active) Report shows that less than 10% of actively managed funds are able to make more than their benchmarks. If only 1 in 10 or in some cases 1 in 20 funds are going to do better than the index, why not just invest in an index fund—a low-cost index fund.

11. When it comes to bond funds, choose those that invest in intermediate-term bonds, especially those with low expenses.

Studies indicate that Intermediate-Term Government Bonds outperform short-term bonds by almost 2% a year and Long-Term Government Bonds by 0.3% a year. Plus, the long-term bonds are about 50% more volatile than intermediate-term bonds.

12. Don’t sit on unproductive 401(k) and IRA investments that you made earlier in your career.

They should be sold and moved into investments that are likely to be more productive. In many cases they can be moved into your current 401(k), which hopefully has better investment choices.

Get rid of any equity asset classes that don’t have a long history of beating the S&P 500. This includes gold funds, commodity funds, and almost any “alternative investment.” If your goal is to find an investment that does well when stocks go down, it turns out that US Government Bonds perform a lot better than many of the popular noncorrelated asset classes the industry touts. For example, over the last 50 years, US Government Bonds have a better return at less than 25% of the volatility of gold.

13. The advice that most people don’t want to hear is, keep working for an extra 5 years before you retire.

This can effectively double your retirement income. Why does it do that? For one thing, you will have fewer years that your portfolio will have to pay you and your spouse in retirement, so you can afford to treat yourself more generously. I assume you will make another 5 years of contributions to your retirement accounts, and it’s fair to assume the entire account will make average returns. And finally, since you will have likely over-saved, you can take a higher percentage annual payout at retirement. In my own case, I continued to work at least 5 years beyond what I needed, so my wife and I could take out 5% or 6% instead of the industry standard of 4%.

​14. If all the diversification that I recommend is more than you are willing to do, or if you just don’t have a full range of investments in your plan, then choose a target date fund.

If you do that, you might also want to put some of your IRA into a small-cap value fund in order to boost your long-term returns without much additional risk. (Check out for more on combining a small-cap value and a target date fund.)

15. Just as picking the right index fund is likely to pay big rewards, picking the best target date fund can also pay very big additional rewards.

For example, the 2060 target date funds at Vanguard and Blackrock are built for very different rates of return. The Vanguard fund has 10% in bonds for the first 20 years (makes me feel sad for their shareholders), while Blackrock doesn’t hold any bonds for the first 20 years. On the other hand, from age 75 on Blackrock has 10% more in equities than Vanguard. The combination of holding too much in bonds at the beginning and end of the investor cycle can easily be a difference of $2 million over a lifetime.

16. Don’t market-time.

This is a tough piece of advice for a lot of investors to accept. While most investors claim they don’t believe in market-timing, it is exactly what they do when they decide it’s time to get out of the market or make a change from one asset class to another. Sometimes it’s changing from international to US, as often happens when international returns trail US returns for a number of years. Sometimes it’s a move from long-term bonds to short-term bonds as investors become concerned that interest rates are going to rise. And of course, in 1973–1974, 2000–2002, and 2008–2009, large groups of investors bailed when they concluded that the market was going to fall a lot more than it eventually did. I understand the feeling because I have watched it happen to so many investors. It’s what I call the ICSIA market-timing system—I Can’t Stand It Anymore!

My conclusion is that most of the investors who rushed to cash out for fear of loss were hurt in the end. Yes, they felt safer being out of the market, but in most cases they missed the great returns “stay the course” investors eventually received.

From all I have experienced, and from all I have read, investors are better served simply dollar cost averaging into the market, guaranteeing they will buy more shares when prices are low and fewer shares when prices are high. If they want to limit their exposure to loss, they should own a percentage of bonds that limit the downside risk. The key is to do that before the loss happens, not after the damage is done!

17. If you are a trustee for your 401(k) plan and responsible for the investment choices of everyone in the firm, put the same dedication into the selection of your 401(k) investment choices as you do the care and treatment of your patients.

You are in a great position to take better care of your own investments, as well as those of the people who are working hard to make you successful. If you aren’t offering low-cost index and target date funds, add them. If you are offering the S&P 500 Index Fund, add index funds that represent large-cap value, small-cap value, REITs, and emerging markets.

If you apply even one or two of these tips, you should be a more successful retirement investor. And if you apply the majority of these tips, your retirement is likely to be much more pleasant and profitable for you and likely your fellow staff.