You’re already doing smart things with your financial plan, like setting aside money for a rainy day fund. But you know your 401(k) could be doing better. You tell yourself that you’re going to set aside the time to make necessary changes.
But is time really the hurdle? Nope. You just need a plan. These three simple hacks will help you breeze through what should be a simple, yearly tune-up.
This regular check-in is important for everyone, but it’s especially so if your employer automatically enrolled you in its retirement plan, notes Liz Weston, author of The 10 Commandments of Money. Auto-enrollments are common, but they leave you (and your money) at certain default settings—which you want to adjust ASAP, she says.
“Retirement is going to be long, and it’s going to be expensive, so you want to maximize every penny you’re saving.”
1. Ratchet up your contributions
If you’re stuck at one of the common default settings, you could be saving as little as 3%. Or, you might have forgotten the contribution rate you chose last year or two (three, five) years ago. The ideal amount is about 15%, says Weston, “but 20% is even better,” given your longevity and likely medical expenses as you age.
What to do now: Check your contribution rate and aim to save enough at least to get the company match if there is one. (Some companies will add, for instance, 50 cents to every dollar you save, up to 6% of your paycheck.)
And remember, 401(k) contributions are capped at $17,500 for 2013; or $23,000 including the catch-up provision of $5,500, if you’re 50 or older, so you can likely save more than you are.
“Check to see if your plan offers auto-increases,” says Alex Benke, Betterment’s CFP®. That can make saving painless.
If you’re not sure whether, say, a 1% increase would make you feel strapped, do a quick back-of-the-napkin calculation, he says: If you get paid twice a month, and make $100,000 per year, and are in the 28% federal and 5% state tax brackets, your extra 1% contribution will be only $27.92 per paycheck. [That’s 100,000 / 24 X 0.01 (1-.33)]
If you get paid twice a month, and make $100,000 per year, your extra 1% contribution will be only $27.92 per paycheck after taxes.
2. Lower your costs
Thanks to disclosure rules from the Department of Labor, investors have more transparency around the fees in their retirement plans (you may have noticed changes in your last few statements). If your statement isn’t 100% clear, speak to a plan rep to clarify the costs associated with the funds you currently have, plus any 401k maintenance charges. Your “all-in” costs should be no more than 1% per year of your total balance—and ideally less.
What to do now: If you’re not invested in these already, you can switch to low-cost index funds, exchange-traded funds (ETFs), or even a target-date fund. If these aren’t offered by your plan, ask your employer why. “Many people don’t realize that their employer has a choice in what they can offer,” says Benke.
If you’re not sure which funds are best for you, you could do a lot worse than choosing a broad stock market fund (like an S&P index fund) and a bond index fund, if available, says Weston. Or, consider shifting your money into a target date fund, which rebalances a selection of investments geared toward your retirement date. Just make sure it’s cheap, less than 0.50%.
Target date (or lifecycle funds) have flaws, and the two-fund system is limited, but choosing any vehicle that gets you saving is better than waiting “to learn more” and losing out on potential market returns.
Wherever you set the asset allocation for your 401k account (many people use the formula of 100 minus their age to decide on the percentage of equities versus fixed income), it’s going to shift as the market moves. Maybe you’re 40 and started with a 60-40 allocation of stocks to bonds/cash, but there’s been a run up in stocks, and now you’re at 70-30 (over the long term, stocks generally outperform bonds, so this is likely to happen eventually).
What to do now: Is that bad? Maybe not, if you’re inclined to take on more risk. But if not, now you’d have to sell some of the shares of your equity-based funds and put more into bonds and cash to get back to your ideal asset allocation. And remember, Benke cautions: Some companies have two settings, one for how new money that’s invested, and one for current funds. “Make sure these are both set to your desired asset allocation.”
No 401k left behind
Last, if you have a 401(k) from a previous job that’s hanging out in retirement-land, and you can’t remember where or what’s in it—tackle that old account, stat. You don’t want to keep your money in an account that might be expensive, hard to access or worse (see nos. 1-3 above) not set up to your benefit. Rollovers have a bad rep for being tricky and time-consuming, but it doesn’t have to be that way.
It’s a three-hack solution: Just remember these things…
- Boost savings
- Lower costs
- Manage risk