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These days more people save in their 401(k) retirement plans by relying on cruise control. You’re automatically enrolled when you join the company, your money is deposited regularly in an investment portfolio, typically a target-date retirement fund, and you leave well enough alone.
A hands-off approach may be fine when you're just starting out. But to stay on track toward a comfortable retirement, it's essential to make periodic adjustments along the way.
“If you haven’t reviewed your 401(k) plan lately, it may no longer reflect the level of risk you want to take or your current financial situation,” says Andrew Sloan, a financial planner in Louisville, Ky.
Yet most people rarely tweak their accounts. Only 8 percent of 401(k) participants made any trade in their plans in 2016, according to a recent Vanguard study, and only 9 percent did so the previous year.
By giving your plan a checkup now, you may be able to trim this year’s tax bill, as well as improve your odds of reaching your retirement goals over the long term. Here are five simple steps to take:
Key Course Corrections
1. Look at the big picture. Probably a lot has changed since you began saving in a 401(k). Maybe you got married and received a few raises. Or you may have switched jobs, and you and your spouse now have savings in IRAs or 401(k)s held by former employers.
If that's the case, you'll want to review all your household accounts. “It won’t help to look at your 401(k) in isolation,” says Christine Benz, director of personal finance at Morningstar.com. “Sit down with your spouse and make sure your financial plans and investing strategy are in sync." You can use your 401(k) plan's tools or other online calculators to help pull the numbers together.
2. Rev up your contributions. The typical 401(k) saver puts away about 6 percent of pay, according to Vanguard. But as a study by Boston College’s Center for Retirement Research found, the typical household needs to save about 15 percent of pay to provide enough income to live comfortably in retirement.
So boost your contributions as much as you can. At the very least, put away enough to get the full matching contribution from your employer, which is typically 50 percent of the first 6 percent of pay. Then gradually raise your deferral rate by one or two percentage points each year or whenever you receive a raise.
“Ideally, you want to max out your 401(k) contributions,” says Benz. In 2017, the maximum contribution limit for most workers is $18,000, but those 50 and older can put away an additional $6,000 in catch-up contributions.
It may not cost as much as you think save more. If you earn $60,000 and kick in 10 percent of salary, your weekly paycheck will be reduced by $69. But if you’re contributing pretax, you also cut your federal taxes by $17 each week, assuming a 25 percent tax bracket. So the true cost of your contribution is just $52, once you factor in that tax break. (To see the tax impact of raising your contribution, try Vanguard’s retirement savings calculator.)
3. Adjust your asset mix. The stock market has been on an eight-year bull run, which makes this one of the longest-lasting rallies in recent history. If you haven’t been regularly rebalancing your stock-and-bond allocations, you probably are holding far more equities than you originally intended, says Maria Bruno, senior retirement strategist at Vanguard.
Someone who started out with a 60-40 stock-and-bond mix may have 70 percent or more in stocks by now. Holding that much in equities raises the risk that you’ll experience much more severe losses than you can handle when the next bear market arrives.
It's easy to adjust your allocation. Just shift enough money from your stock bonds to your bond funds to restore your original asset mix. Or you could switch to a target-date fund, which will give you all-in-one diversification and do your rebalancing for you.
4. Lower your fees. Many 401(k) plans now offer more low-fee investing options than before, including index funds and institutionally priced (read: cheap) investment funds. But if you’ve been investing for more than few years, you may hold a portfolio that includes actively managed funds, which often levy higher fees. Lowering your expenses is the simplest way to increase your returns, says Benz.
So look for the most reasonably priced 401(k) funds in your plan. In large company 401(k)s, funds typically charge less than 0.5 percent. But you can probably do better—fees for broad-based index funds are generally 0.20 percent or less.
5. Take advantage of new 401(k) services.
The overall financial well-being of workers, including their ability to manage budget and manage debt, has become a priority for more employers. Some 59 percent of companies are likely to expand current financial wellness programs in 2017, and another 49 percent are likely to launch new ones, according to a recent survey by benefit consultants Alight Solutions, formerly known as Aon Hewitt.
These offerings typically include tools and services in areas such as investing basics, healthcare education, and budgeting. For those nearing retirement, some plans are starting to provide guidance on claiming Social Security and designing a retirement income strategy, the Alight Solutions survey found.
To find out what tools and guidance your employer may offer, ask your benefits department or go to your 401(k) plan’s website. “It makes sense to take advantage of all the help you can get,” says Benz.
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