Broker Check

How To Plan Your Retirement With Your 401(k)

June 06, 2023

This information is provided for educational purposes and includes information specific to small business owners, niche markets, and/or only certain clients. Your 401(k) may not offer all features discussed. Please consult with a financial professional to understand what options are available to you.

You want to retire someday! Whether your retirement dreams are sandy beach houses or snowy mountain cabins, thinking of not having to work or worry about the daily grind seems wonderful. Wonderful, that is, until your mind starts to drift to the scarier side of the dream. How will you retire? When can you retire? Will you run out of money in retirement?

How much do you actually need to save in order to retire? Where do you need to put those savings? Chances are that the first savings method you think of is your employer-sponsored 401(k). The 401(k) may be the most widely used tool in America for putting away money toward retirement, but that was not always the case.

401(k) Ends Pension Plans

Back when pension plans were the norm, retirement saving was more automatic. The largest portion of the responsibility for saving for retirement rested with the employer. Pension plans segmented a healthy portion of an employee’s salary toward retirement, providing a largely predictable stream of income when the time came for the employee to retire. Pensions automatically considered the need for both accumulating monies, and the eventual distribution of that money as retirement income.

In the early 1980s, a benefits consultant was reviewing the tax code, trying to find ways to make retirement more tax friendly. IRS Code, Section 401(k) allowed employees to avoid being taxed on deferred compensation. This consultant adopted a strategy for his own company to provide a new type of retirement plan to its workers, and it was named after the IRS Code that allowed it.[i]

The next year, the IRS issued new directives that allowed employees to fund their 401(k) through payroll deductions, and within just a couple of years nearly half of all large companies were moving toward offering 401(k) plans. These plans quickly became the norm.[ii]

The most significant impact of 401(k) plans was the shifting of the burden of planning for retirement income from the employer to the employee. 401(k) type plans focus much more heavily on the accumulation of money for a later retirement and have almost no provision or strategy for the distribution of that money as income in retirement.

With the shift of savings burden to the employee, it’s not uncommon for stress around saving for retirement to grow and remain through retirement. There has not been adequate workplace education around 401(k)s and how the employee is to undertake the planning responsibility for income in retirement.

Pensions may have largely gone away, but that doesn’t mean you can’t enjoy your life on the beach or in the woods. More than ever, it’s important to develop a strategy that will grow and change with you over time so at retirement you’re in a place you don’t have to worry. That’s living beyond money!

How to Fund Your 401(k)

When you started working for your company, you were likely given the option to defer a percentage of your salary into a 401(k). This deferral amount is often matched up to a certain percentage or dollar amount by your employer.

Maybe your employer doesn’t have a 401(k), but has a similar type of plan. There are two other retirement plan types most commonly offered by employers. A 403(b) is a retirement account for certain employees of public schools and other 501(c)(3) tax-exempt organizations. A 457 plan is a retirement plan primarily for civil servants, municipal employees, and first responders, as well as other tax-exempt organizations.

All leaders and executives should be putting the maximum matched amount possible into their 401(k). Get every available “free” dollar in matching possible. There are contribution limits to what a person can contribute to their 401(k)Here are the maximums allowed by the IRS in 2023:

  • 401(k), 403(b), and most 457 plans - $22,500
  • Catch-up contributions for employees aged 50 and over allows an additional $7,500[iii]

These limits increase every year or two, so it is important to check with your financial advisor or tax professional to see that you’re contributing the maximum each year. This is an often-overlooked opportunity because your 401(k) contributions come out of your paycheck automatically.

While contributions to your 401(k) can build quickly, putting money away only in your 401(k) will not be enough to retire. Additionally, the 401(k) by itself as a retirement income plan is extremely inefficient. We’ll look at other things you can do to maximize efficiency later, in the chapter about putting together your financial plan.

Balancing Your Overall Strategy

While we just said you should be putting the maximum amount possible into your 401(k), it is also important that you don’t get out of balance with your overall financial portfolio and investment strategies.

Your 401(k) is considered a “qualified” account. A qualified plan meets ERISA guidelines.[iv] Qualified plans allow for certain tax benefits, usually in the form of pre-tax dollars from an employee’s wages for investment into the qualified plan.

Simply stated, these qualified dollars are generally pre-tax investment dollars you’ll have to pay taxes on when you withdraw them in retirement. Having all your retirement in pre-tax or qualified accounts could mean a significant tax liability all the way through retirement. So, while your 401(k) is a great place to put away funds for your future, it’s important that these accounts be balanced with nonqualified accounts or other strategies that will minimize your taxes in the future.

This is a great point to bring up with your financial advisor when talking about your overall financial portfolio and strategies.

Is Pre-Tax or Roth Better?

Many 401(k) plans offer two types of deferral options. These types will determine how taxes are paid on the funds. The first is the pre-tax or before-tax option. In a pre-tax 401(k), money is withheld from your paycheck before taxes are taken out and you’ll pay taxes on this money when it’s withdrawn in retirement. For most employees, it makes sense to put your money into the pre-tax 401(k) to receive the tax advantage.

For example, let’s say your taxable income is $300,000 annually. A 401(k) deposit of $22,500 will save you approximately $6,750 in taxes on those funds, assuming your combined federal and state tax rate is 30%.

When you withdraw money from your 401(k) in retirement, you’ll pay taxes on these funds at that time. Assuming you’ll be in a lower tax bracket when you’ve retired than you are in your working years, you’ll pay less taxes later. We’ll come back to this concept later when we talk about a balanced portfolio.

The other type of account is a Roth 401(k). This can be the better choice for younger executives who are earning $175,000 or less because they are likely in a lower combined federal and state tax bracket. Roth 401(k) funds are taxed prior to being deposited into the 401(k) account. Withdrawals from a Roth account are tax-free in retirement if the account is at least five years old (or after age 59 ½), based on current tax law. If you believe your tax rate will be higher in retirement, funding a Roth 401(k) and paying a lower tax rate now may make sense.

A Third Option

Some employers offer an after-tax saving or investment account within their 401(k) plan. These accounts are like a regular investment account but are contained within the employer’s plan offering. After-tax accounts are usually not eligible for any employer matching. While these accounts do not offer pre-tax options, or tax-free growth like a Roth, they do have several advantages.

The first advantage is these after-tax accounts allow for easy access to funds, though still limited to the plan’s investment requirements and options.

A second and possibly greatest advantage is that after-tax accounts are currently taxed at low maximum tax rates, called capital gains rates. These can be considerably lower than ordinary income tax rates.

If your employer offers this type of account, it may make sense to put some money into it after maximizing your 401(k) contributions. And if your employer plan offers the opportunity to convert after-tax account funds into your Roth 401(k), that may also be a good move as you’d only pay taxes on the earnings (growth). 

Investing Your 401(k)

If your employer 401(k) plan is the primary investment vehicle for retirement saving, it makes sense to be diligent about the way these funds are invested. Without a doubt, this is one of the most asked questions with our new executive clients.

You’ll typically have a list of funds you can choose from, once your 401(k) is open. If your company is publicly traded, you may also have the option to invest in your company’s stock. We want to caution you about overweighing your portfolio in your company’s stock. For the same reason you don’t put all of your eggs in one basket, it may not be a good idea to heavily invest in one stock at the risk of balance across your entire investment portfolio. We’ll talk more about investing in your company’s stock in a later chapter.

It's highly likely you’ll have an online portal where you can login to look at investment options and even get some guidance about what a reasonable investment allocation will look like for you, based on your age and salary. Remember that this tool is provided as a resource specifically designed for your employer’s retirement account options. The tool doesn’t know your goals, how your other assets are held, or what short, medium, and long-term needs you and your household have.

As a starting point, you can look to see if your retirement plan offers target allocation funds. These funds are generally suited for investors based solely on their age and an approximate retirement age of 65-67. As time goes on, these target allocation funds will systematically rebalance to provide the proper amount of risk based on age. The investment risk will gradually decrease the closer your age gets to retirement by reallocating the assets into different investments.

Asset allocation refers to the ratio of different asset classes in an investment portfolio, and is determined by one’s investing objectives, time horizon, and risk tolerance. At the highest level, asset allocation refers to the percentage of assets in equities (such as stocks), and fixed-income options (such as bonds). Using some simple formulas to determine portfolio allocation mix can be a starting point for deciding how to balance between equities and fixed-income options. The point of these formulas is to help illustrate the conventional wisdom that nearing retirement, it may be important to lower risk and protect assets.

A general rule of thumb is [age minus 20] to determine the percentage of the portfolio in bonds or fixed-income options. The rest would be in equities. At retirement, this puts your allocation at a conservative 60/40 mix with 60% in stocks and 40% in bonds.

There are two other common ways for asset allocation calculations. One is age in bonds, and the other is a formula: [age minus 40, times 2]. Using this formula, bonds don’t really show up in a person’s portfolio until around age 40. See the chart below to illustrate:


Whatever you choose as an allocation, it is important to rebalance annually (or semi-annually is okay) so that your asset allocation stays on target with your goals as well as your other investments. Your profile will shift in balance over time as asset managers work to keep strategies pointed toward their intended targets. If you’re working with a financial advisor, rebalancing your 401(k) can be part of your check-in meetings or annual review discussion.

Rolling Over Your 401(k) From A Previous Employer

Should you roll over your 401(k) from a previous employer? We typically recommend you roll those funds over to an IRA as soon as you leave your previous position, though it is important that you talk with an investment professional to determine if this is the best option for you. Forgotten retirement accounts can end up costing you money. Since you are no longer with that employer, you can easily miss out on communications, plan changes, and even fee updates that cost you more and more over time.

When you leave your employer, you have options for your 401(k). You can choose to leave the money in the former employer’s plan, if permitted. You can roll assets into your new employer’s plan if one is available, and rollovers are permitted. You can roll assets over to an IRA. Or you can cash out the account value. A financial advisor can work with you to look across all your savings and investment accounts and provide guidance based on your overall risk tolerance, goals, and needs.

Required Withdrawals

According to the 2023 tax code, you will be required to start taking withdrawals from your 401(k) and/or IRA at age 73. This amount you must take will slowly increase over the next few years, based on your age. To begin, the required amount is approximately 4% annually. Because you haven’t already paid taxes on these funds, you’ll be subject to income taxes based on your total income in retirement.

In-Service Withdrawals

An in-service withdrawal is a withdrawal from your 401(k) while you are still working. These types of withdrawal may be possible at any time but can have penalties if certain conditions are not met. In-service withdrawals may be used to cover a qualifying financial hardship, such as medical expenses. Hardship withdrawals and the conditions required to document them are defined by the IRS and are usually outlined in your 401(k) plan paperwork.

Another type of in-service withdrawal is rolling over your 401(k) funds into some other type of qualified account. This gives you the opportunity to manage your own investments in vehicles that may not be offered by your 401(k) plan. Again, your employer might have specific conditions required for a rollover to be permitted.

A third option is the “optional withdrawal”, which makes it is possible for you to take withdrawals from your 401(k) starting at age 59 ½ without penalty, though you will still pay your ordinary income tax rates on the withdrawals. Anything withdrawn prior to age 59 ½ may also carry an additional 10% withdrawal penalty.

What About 401(k) Loans?

The easy answer is, we urge you to strongly consider whether this option is right for you. Taking a 401(k) loan likely means you’re taking out pre-tax dollars for use and paying yourself back with after-tax dollars. This results in losing a significant tax advantage provided by your 401(k). If you’ve planned well, these types of loans don’t even really need to be discussed. We highly encourage you to consult your financial professional before taking out a 401(k) loan.

If you leave your company while there is a 401(k) loan outstanding, you’ll likely be put on a payment plan to repay that loan that can put you into a financial bind. In some cases, you may have to repay the entire loan within 90 days.

Rule of 55

In some cases, you can take withdrawal from your 401(k) plan as early as age 55 without suffering the 10% early withdrawal penalty.[vi] If there is a particular expense on the horizon, and you’re prepared to absorb the tax implications of an additional income amount, this concept may apply to you.

If you’re older than age 54, but not yet age 59, there may be a reason for you to leave a small amount of money in a 401(k) rather than roll it into an IRA when you leave that company. Again, money withdrawn from a 401(k) is considered taxable income. Your employer must withhold 20% for income tax. It’s possible you could get some of that refunded back to you. That would be determined by your tax professional.

Recapping 401(k)s

Your employer-sponsored 401(k) is just one of many resources you can use to prepare for retirement. As an executive, we suggest you consider putting away the maximum allowable annual contribution to your 401(k) account. When you use a 401(k) with other tools, you may find this simplicity of consistent contributions to your employer plan an efficient and effective way to save for your future.


[i] - 5/25/23

[ii] – 2/4/23

[iii] - 2/4/23

[iv] The Employee Retirement Income Security Act (ERISA) was enacted in 1974 and intended to protect workers’ retirement income while providing both information and transparency. - 2/6/23

[v] – 2-4-23

[vi] - 2/4/23

Guardian, its subsidiaries, agents and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation. The information provided is based on our general understanding of the subject matter discussed and is for informational purposes only. Past performance is not a guarantee of future results. All investments contain risk and may lose value. Investing in the bond market is subject to certain risks including market, interest rate, issuer, credit and inflation risk. Equities may decline in value due to both real and perceived general market, economic and industry conditions. Diversification does not guarantee profit or protect against market loss. 2023-155787 Exp. 6/25