The son of a close buddy of mine recently graduated from college and landed a job with good pay and benefits. Among those benefits is a 401k plan.

Because I’m a financial analyst, he asked me for advice on how to get started with a 401k, and the best ways to keep the plan on track throughout his career. (Friends and family all come to me for financial advice; it’s an occupational hazard.)

He’s in his mid-20s (must be nice!), which means he has enough time to build a seven-figure 401k, if he puts down the right foundation from the start.

The stakes are high for all Americans, regardless of age. According to the latest data from the Investment Company Institute, the 401k is the most commonly owned retirement account in the United States. Americans held $6.6 trillion in 401k plans, in more than 625,000 plans, on behalf of about 60 million active participants and millions of former employees and retirees (as of the end of 2022).

As I told my friend’s son, if he can manage to infuse his 401k portfolio with the following seven tenets, he’ll retire with more money in his retirement plan than he ever thought possible:

1. Start Early. There’s no substitute for getting a good start on your financial future. All the studies on the subject conclude that the earlier you get going with your 401k, the more money you’ll have in retirement. That’s because the earlier you start, the earlier compound interest goes to work for you.

2. Learn The Latest Contribution Limits (see the following chart for this year):

3. Max Out. 401k’s provide a multitude of benefits for investors. One of the most beneficial is the plan’s tax-advantaged status. In short, the more you contribute to your 401k plan every year, the less you’ll pay in taxes to Uncle Sam. Then there’s the obvious advantage of maxing out and investing the legal limit in your 401k. The more money you invest, the more your company might match, and the faster you’ll build a substantial nest egg.

4. Learning Is Earning. The value of good investment research is priceless. And the value of knowing enough about your 401k to become the master of your financial future is crucial. Read all you can on finance and investments, and make sure you read every word of the 401k packets, brochures, and memoranda that come your way from your employer each year.

The payoff for spending an hour or two a week boning up on the ways of Wall Street is potentially huge, particularly because 401k’s are starting to expand and go global. Don’t be left behind. (And that’s where the team of seasoned pros at Investing Daily can help.)

5. Be Aggressive. Extreme prudence is the proper course if you’re an airplane pilot or a brain surgeon. But it’s a drawback for 401k investors. Studies show that to beat inflation and to make your money grow faster, a good chunk of your plan should be earmarked for higher-performing stock funds. That doesn’t mean you should be reckless. There’s no rule that says you have to put money into Portuguese debentures because your pal in accounting did. But if you stick to conservative investments like bonds or, worse, bank savings accounts, your chances of becoming rich in retirement are virtually nil.

6. Keep the Money Working. Over the years I participated in other profit-sharing plans. When I left those companies, I was given the option of taking the cash and rolling it over into another tax-deferred investment plan like a 401k or Individual Retirement Account (IRA) or taking the money in a lump sum and using it as I wished. The latter is a bad move and here’s why: the government wants you to roll the money over and they’ve set up expensive traps if you don’t.

The IRS can take up to 20% of your retirement plan assets away from you if you elect to take a lump sum payout when you leave a job. If that’s not grim news, consider this: the IRS will also tax you on the capital gains your money has earned while participating in the plan.

7. Know Your Risk Tolerance. This is crucial. If your portfolio takes a sharp turn for the worse when you’re in your 40s, you still have plenty of time to bounce back. But if your investments take a nosedive while you’re, say 65, you’re in a far worse predicament. Always know going in what you can afford to lose and, going forward, manage your portfolio correspondingly.

PS: For our special report on safe, high-income stocks suitable for all types of retirement portfolios, click here.

John Persinos is the editorial director of Investing Daily. Questions about your 401k plan? You can reach John at: mailbag@investingdaily.com.

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