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And, The Winner of the 401kRace Is....You

By Jack Towarnicky

If you participate in your 401(k) plan, you win!  It is that simple.  Here are 10 steps to winning the 401kRace.    

10. Start saving and keep your money in the plan.  You don’t need to know the precise, final destination to start the 401kRace.  As Yogi Berra once quipped:  “If you don't know where you are going, you might wind up someplace else.” That is certainly true with regard to 401k savings. But, look to your left and your right, look in front of you and look behind you. Tens of millions of 401k savers can confirm that your financial fitness will improve wherever you end up. Forego hardship and post-separation, pre-retirement distributions.  Those premature payouts are like retracing your steps back to the starting line and starting all over. They make winning the 401kRace that much more difficult. 

9. Tied to the mast.  Tempted to spend all you take home, or more?  If you do, you’ll never win the 401kRace. Ulysses, in Homer’s epic poem the Odyssey, knows the songs of the Sirens are irresistible. They are so tempting that he is certain they will tragically end his voyage.  Ulysses orders his men to tie him to the ship’s mast and to plug their ears with wax so they could not hear his pleas.  You can defeat the “Spending Sirens” by using payroll deduction processes to “pay yourself first.” One survey perennially confirms that while ~71% of Americans say they live paycheck to paycheck, ~86% also save in their employer-sponsored plan.1

8. Financial expertise not required.  You don’t have to be an investment wizard to win the 401kRace. Tens of millions of Americans have successfully retired and few are investment gurus.  Your employer can help by adopting automatic features – more than 60% of surveyed plans already have these types of behavioral economics provisions in place.Best practices include automatic enrollment, escalation, and investment provisions. And, even if you already participate, reach out and encourage your employer to adopt automatic features – so your coworkers don’t miss out.  

7. Dreams of footprints in the sand.3  All 401(k) plans include tax deferral on investment earnings. A saver’s lowest and most difficult times often result from interruptions in wages and saving - during periods of unemployment. Looking back, those who resist taking 401(k) distributions often see a single set of footprints in the sand – when their retirement dreams were “carried” by tax deferred returns on accumulated savings. 

6. 401k assets are fungible.  Fungible means mutually interchangeable, e.g., money that is raised for one purpose can easily be used for another.4 You need not restrict 401k assets to retirement preparation if your plan incorporates 21st Century plan loan liquidity provisions. Tax-preferred liquidity also allows you to save a higher percentage of pay than you believe you can afford to earmark solely for retirement. Most people don’t save enough, most live payday to payday, most believe they can’t afford to save more, and most have other needs – needs that are not more important, but perhaps, more urgent. Instead of trying to save for multiple needs, putting so much in this account for a car, a child’s college education, etc. leverage the tax preferences and employer match in your 401(k) plan – along with the inherent fungibility of money. You probably pay at least one bill electronically. Why not your 401(k) loan? Encourage your employer to add electronic bill paying functionality so that repayment can continue even where employment ends. Electronic bill paying also adds tax-favored access after separation. Here is how it works:  Save, get match, invest, accumulate, borrow for current needs, continue to save, repay the loan, rebuild the account for future, greater needs.  

5. The power to tax is the power to destroy.5  Taxes on payouts of 401(k) contributions plus earnings may be significantly different.  Payouts of pre-tax 401(k) contributions and earnings on those monies are treated as taxable, ordinary income. Payouts of Roth 401(k) contributions and earnings on those monies may be tax free if they are paid after you reach age 59 ½. If your contributions are limited6 or if you believe you will be in a higher marginal tax bracket upon payout, ask your employer to add Roth contribution and in-plan conversion provisions so you can pay taxes now and increase the after-tax value of your retirement assets.    

4. Aggregate, Consolidate, Simplify.  Encourage your plan sponsor to adopt rollover and Deemed Individual Retirement Account (Deemed IRA) provisions. There may be significant value in aggregating or consolidating retirement assets. Economies of scale matter.  Typically, as 401(k) and IRA accounts increase in value, administrative costs decline. Similarly, as IRAs increase in value, investment costs may be less for certain classes of mutual funds that require a minimum balance. Finally, consolidating retirement assets offers a single view of investment allocations. A single view of all retirement assets may improve your investment decision-making.  

3. Many hands make light work.7  A single person or a single plan can sometimes carry the entire load. However, if you are married, most couples improve their family’s chances of winning the 401kRace if each participates in their own employer’s plan.  Another strategy to consider is to seek out employers who offer multiple retirement benefit options – defined benefit pensions, 403(b) annuities, 457(b) deferred compensation, retiree medical coverage, etc. Also, a successful retirement may be much more likely where there are multiple income sources – along with Social Security, Medicare, home equity, 2nd career employment, etc.8

2. First things first.  Once you commence payout of retirement benefits, the value you ultimately receive could be substantially different depending on the order and rate of payout you choose for each income source. For example, a worker age 65 today who could have started Social Security at age 62, will receive a higher nominal dollar amount by deferring commencement. For every $1,000/month she could have received at age 62, she could instead elect $1,333.34 at Social Security Normal Retirement Age 66 or ~$1,760 if she defers commencement until age 70. Also, the amount of Social Security benefit you get to keep may depend on other taxable wage and investment income you receive. Further, when Medicare coverage starts, your income may affect the amount of premium you pay for Medicare coverage of physician services and drug coverage. So it may make a difference when you commence retirement payouts and whether payments are taxable or tax free.   

1. Legacy.  “Fueling financial fitness from grade school to retirement” is a tag line.  Are you a parent?  If so, your 401kRace finish line may not be retirement.  It may also include creating a legacy of disciplined saving for children and generations to come.   

1. Getting Paid in America, American Payroll Association, September 2017, Accessed 04/04/18 at:  
2. PSCA, 60th Annual Survey, 2018, See:  
3.Anonymous, Footprints in the Sand, Accessed 04/04/18 at:  
4. Towarnicky, Financial Wellness Via Your 401(k), 11/7/17, Accessed 4/4/18 at: 
5. Daniel Webster, in his arguments in the Supreme Court case, McCulloch v. Maryland:  “An unlimited power to tax involves, necessarily, a power to destroy,” 17 U.S. 316 (1819); See also Chief Justice John Marshall’s unanimous opinion:  “That the power of taxing it [the bank] by the States may be exercised so as to destroy it, is too obvious to be denied” (Id. at 427), and “That the power to tax involves the power to destroy … [is] not to be denied” (Id. at 431).  Accessed 4/4/18 at:   
6. Contributions might be limited for one or more reasons, such as:  tax code limits, plan provision limits, etc.   
7. John Heywood, The Proverbs and Epigrams of John Heywood (A.D. 1562), “Many hands make light work.”, Accessed 4/4/18 at:   
8. Towarnicky, The “Other” Retirement Planning Model, 3/30/18, Accessed 4/4/18 at: 

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