As we begin the New Year, it’s a good time to revisit options for your 401k plan.
It’s true: many people have a bad taste in their mouths because the average 401k (held 10 years) is still worth less than it was two years ago—even with contributions and employer matches. However, this should not prevent you from utilizing this tool to build your retirement nest egg.
A study conducted by the ING Retirement Research Institute showed that nearly half (48%) of respondents ages 25 to 69 who are employed full time and earn at least $40,000 a year don’t feel prepared for retirement. That’s despite the fact that 75 percent of that same group do contribute to their workplace’s retirement plan. In another poll by Gallup, 66 percent of Americans ranked not having enough money for retirement as their top financial concern. This is up from 53 percent a decade ago.
There are ways to get back on track, and it starts with a New Year check-up. Just like your annual health physicals, it’s a good idea to make sure your 401k is operating at peak efficiency. Consider the following points as you put a plan in place, or update an existing one. For the first time in four years, our 401k plans got a raise. On October 20, 2011, the IRS announced an increase in annual contribution limits from $16,500 to $17,000. Also, if you are 50 or over, you are able to contribute an additional $5,500. This provision allows those over age 50 to start saving more rapidly, as they are much closer to retirement.
Electing a fixed dollar amount or percentage to be invested each payroll period is a solid, disciplined investment strategy. It allows you to spread your contributions evenly throughout the year and budget more effectively.
If your company provides a match, you should contribute enough to receive the full match. You don’t want to leave that company match benefit on the table. It’s free money!
Only put in as much as your budget can afford. Even if you are behind in your retirement savings goals, don’t elect high payroll contributions if it means your family finances will suffer this year.
If your company offers a Roth 401k option, it is worth taking the time to analyze whether a Roth makes sense for you. The Web has many calculators and tools to make this determination. Your plan provider may also offer this service to you at no additional cost. For many of us, a Roth makes a lot of sense, so don’t ignore this benefit option.
Remain well diversified in your portfolio. The market has been a roller coaster over the last few years. By staying the course with your original investment plan and staying disciplined in your long-term strategy, you will be rewarded when it comes time to retire. Don’t let the short-term anxiety of the markets alter your long-term plan.
If your company issues stock and it is available as an investment in your 401k, try to avoid owning too much of it. You want to be diversified in your portfolio holdings, and owning too much of any single company in your plan defeats this goal. In addition, should something negative happen to your company—and therefore, your job—the last thing you want is for your 401k plan to go down with the ship.
Now is a good time of year to create or review your retirement projections with a financial advisor to confirm that you are on the right track.
As you put your plan together or make changes to your existing plan, it is important to keep in mind that life expectancy is increasing about a month per year, so a 65-year-old retiring today can expect a 20-year life expectancy, while their children need to plan for more than 25 years. The good news is that you do have control over the size of your retirement nest egg. Educate yourself on your options, stay disciplined, remain diversified, pay attention to costs and tax ramifications, and remember: the earlier you start saving, the better. iBi
Julie Dreesen is a financial advisor with Savant Capital Management.