For many people, their 401(k) plan represents their most significant retirement savings vehicle. Thus, to make sure you have sufficient funds for retirement, you need to get your 401(k) plan on track. To do so, consider these tips:
Increase your contribution rate. Strive for total contributions from you and your employer of approximately 10% to 15% of your salary. If you’re not able to save that much right away, save what you can now and increase your contribution rate every six months until you reach that level. One way to accomplish that is to put all pay increases immediately into your 401(k) plan. At a minimum, make sure you’re contributing enough to take advantage of all employer-matching contributions.
Rebalance your investments. Don’t select your investments once and then ignore your plan. Review your allocation annually to make sure it is close to your original allocation. If not, adjust your holdings to get your allocation back in line. Selling investments within your 401(k) plan does not generate tax liabilities, so you can make these changes without tax ramifications.
Use this annual review to make sure
you are still satisfied with your investment
choices. Avoid common mistakes made when investing 401(k) assets, such as allocating too much to conservative investments, not diversifying among several investments, and investing too much in your employer’s stock.
Don’t raid your 401(k) balance.
Your 401(k) plan should only be used for your retirement. Don’t even think about borrowing from the plan for any other purpose. Sure, that money might come in handy to use as a down payment on a home or to pay off some debts. But you don’t want to get in the habit of using those funds for anything other than retirement. Similarly, if you change jobs, don’t withdraw money from your 401(k) plan. Keep the money with your old employer or roll it over to your new 401(k) plan or an individual retirement
account.
Seek guidance. It is important to
manage your 401(k) plan carefully
to help maximize your future retirement income. If you’re concerned about the long-term future, call for a review of your 401(k) plan.
Pay Yourself First
To force yourself to save regularly, treat those savings as a bill to yourself and pay that bill first. Consider these tips:
Reduce spending, diverting those reductions to savings. One way to accomplish this is to cut back on your spending, perhaps reducing your expenditures for dining out, traveling, clothing, or entertainment. Another alternative is to find ways to spend less for the same items. For instance, get quotes for
your car and home insurance from several companies, placing any premium reductions in savings.
Save all unexpected income. Immediately save any money from tax refunds, bonuses, cash gifts, and inheritances. Before you get used to any salary increases, put that raise into savings.
Make saving automatic. Resolve to immediately set up an investment account that automatically deducts money from your bank account every month. Another good alternative is to sign up for your company’s 401(k) plan. (Keep in mind that any automatic investing plan, such as dollar cost averaging, does not assure a profit or protect against loss in declining markets. Because such a strategy involves periodic investment, consider your financial ability and willingness to continue purchases through periods of low price levels.)
Financial Thoughts
Baby boomers are expected to transfer $68.4 trillion in wealth to heirs over the next 25 years (Source: Journal of Financial Planning, May 2020).
In a recent survey of those who do not expect to retire, 60% do not believe they will be able to afford retirement. The other 40% preferred not to retire in order to continue socializing with coworkers and maintain the mental stimulation of working. Only 25% of workers who are delaying their retirement are doing so because they want to maintain their medical insurance until they qualify for Medicare. Approximately 79% of workers are interested in the possibility of a phased retirement program (Source: MetLife, 2020).
Approximately 60% of U.S. adults do not have a will. And approximately 1/3 are missing a healthcare directive in their estate planning (Source: Journal of Financial Planning, April 2020).
About 55% of inheritances are less than $50,000 (Source: Federal Reserve, 2020).
Approximately 26% of of people who stop working entirely will return to work (Source: Journal of Financial Planning, November 2019).