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One of the keys to building a healthy and sustainable retirement savings plan is to take full advantage of an employer-sponsored retirement account. The following are several factors to consider when reviewing your retirement plan options.

How much should I contribute to my retirement savings plan?

At a minimum, consider contributing an amount that ensures you are maximizing any employer match. The company match is often specified by a percentage amount, so you’ll want to withhold at least the minimum percentage to capture the full employer match. That way, you won’t leave free money on the table.

Once you have met the minimum percentage, consider increasing your contribution as much as possible based on your cash flow situation. A good rule of thumb for younger investors is to withhold at least 10% from each paycheck, but you may need to increase that amount depending on your current situation and the size of your retirement nest egg.

If you have a 401(k) or 403(b) through your employer, you may be eligible to contribute up to $19,500 (those age 50 and older can add an additional $6,500 as a catch-up contribution) in 2021. Those who have access to a SIMPLE plan through their employer can contribute a maximum of $13,500 (with a catch-up contribution of $3,000 for those who are age 50 and older) in 2021.

Traditional or Roth?

Once you determine an appropriate contribution amount, you need to select a specific type of account within the plan. The typical options are traditional (or pre-tax) and Roth accounts.

Contributions to the traditional account are pre-tax dollars, grow tax-free, and aren’t taxed until you withdraw them in retirement. Contributions to a Roth account are post-tax dollars, grow tax-free, and are not taxed when you withdraw them in retirement.

There are some general rules of thumb about the two types of accounts:

  • Roth contributions are generally favorable for younger people in lower tax brackets.
  • As you age and enter higher tax brackets, a mixture can be a good option – 50% in pre-tax and 50% in Roth, for example.
  • For older employees or people in higher tax brackets, putting all contributions in the traditional account can be most beneficial.

Typically, you can change your contribution allocation at any point throughout the year, so it’s best to consult with your tax advisor on an annual basis to set up a strategic funding plan between traditional or Roth each tax year based on your situation.

How do I invest?

The next step in fine-tuning your retirement account is to choose the investments within the plan. Most plans offer at least two general investment strategies.

The first strategy, which is often the default, is to invest within a target-date retirement fund. These funds calculate an estimated retirement year based on your age. They are typically diversified funds that offer exposure to U.S. and international equities and often include a mix of diversified corporate and government bonds. The younger you are, the riskier your target-date fund. But as you age and move closer to the target retirement year, the account automatically dials down the risk, positioning you for potential withdrawals in retirement.

If you have no interest in managing the underlying investments within your retirement account, target date retirement funds can be a great option. Think of these funds as a “set it and forget it” option.

The second strategy is for those who favor a more hands-on approach and requires the selection of individual funds that target specific asset classes. For example, you might see funds that offer exposure to large-company U.S. stocks, international stocks, bonds, and even publicly listed real estate. These funds can provide a great option for building a customized portfolio within your retirement account.

Should I rebalance my retirement savings?

If you decide to build a diversified allocation using asset-class funds, remember to set up automatic rebalancing at least annually. This will help ensure (due to movements in the market) that your overall allocation stays fairly consistent over time and that your retirement portfolio remains at the risk level that you intended.

By periodically applying these key concepts to your retirement account, you can rest assured that you’re taking the appropriate steps to move closer to your retirement savings goals.


This is intended for informational purposes only and should not be construed as personalized financial or investment advice.

William V. Gunlicks William V. Gunlicks Financial Advisor / Team Lead

Will has been involved in the financial services industry since 2003. He serves on the board of directors for the Greater North Shore Estate & Financial Planning Council.

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