The beginning of a New Year is always a good time to reflect on things many of us have put off or neglected and to make a plan of action to change our lives for the better. For some this means an exercise routine to get in better shape or a new diet to shed a few pounds, and for others it may be improving a relationship or finances. For somethings like exercise or anything that requires a regular routine, just know on average it takes 66 days to form a new habit. Try to think of ways or motivations to stay at it until it’s entrenched as a habit.
Other things might not require the daily routine, such as reviewing your retirement savings, but this still takes some effort and thought. There is no better time than the present to make smart moves that put a sound retirement strategy on auto pilot and feel good these changes can help build a bigger nest egg – a little financial fitness made easy if you will.
Here are six things you can do right now with your 401(k) to help you save smart for retirement (if you don't have access to a 401(k), start an IRA and most of this will apply):
- If your employer offers a 401(k), and you aren’t enrolled, go do it now. Just let your employer know you want to enroll, and you can typically get started online pretty quickly. This helps make your saving automatic and may lower your taxes too.
- If you are enrolled in a 401(k), review how much of your salary you are deferring into your 401(k). Are you contributing 10%-15%? This is the level most experts recommend contributing each year over a career to be well positioned for a comfortable retirement. This can be tough for many, but you can increase your deferrals in smart ways that won’t hurt your budget. When you get your merit raise this year, up your 401(k) deferral by one or two percent until you get there. Check out this calculator that can show you how much a percent or two more can mean.
- Make sure you are getting your full company match if your company provides one. This is free money that can make a significant difference down the road. It also counts towards the percent you are saving for retirement. So, if you company matches at 3% and you are saving 7% of your salary, you are saving 10% of your salary for retirement.
- Did you, or are you about to turn 50 years of age? If so, you just qualified to contribute up to $6,500 more to your 401(k) (it’s called catch-up contributions). You now have the option to contribute up to $26,000 total in 401(k) contributions plus any employer matching.
- Review how you're invested and make sure it aligns with who you are as an investor and your timeline. This is your asset allocation or how much you have in stock funds, bonds, and/or cash. As people get closer to retirement, they typically want a less volatile portfolio than say someone who is 25 and know they have decades to ride out market ups and downs. Stocks tend to be more volatile so generally a person that might have had an 80% stock / 20% bond allocation in their 30s might have adjusted to something like 65% stocks / 35% bonds in their 50s. There are investment questionnaires, advisors or other tools that can help you figure out the right mix for you. If you chose a model portfolio or target date fund, make sure it is still appropriate or the right date for when you plan to start using the money. Take the time to figure out your investing strategy and stick with it so you are prepared for whatever the markets may bring.
- Review the funds offered in your 401(k) and do a scan for funds with lower expenses, like index funds. One of the biggest drags on your future returns can be the fund expense ratio. The more you pay in investment expenses, the less is going towards investing in the markets. Funds with over 1% in expenses are actually considered expensive. Index funds tend to have lower expenses than the actively managed mutual funds or insurance products that are pervasive in many 401(k) plans (but not at ShareBuilder 401k :) ). See what low-expense options and/or index funds are in the asset classes you’ve chosen, and you probably want to ensure you are in these vs. the more expensive funds. When considering historic performance of your fund options, look at 5- and 10-year performance numbers vs. 1-year or shorter. While no guarantees, you are looking for funds that perform over time not the hot fund of the moment.
Unlike a diet you must work to stick to daily, once you’ve taken the time to make these financial moves with your 401(k), you can do a quarterly or annual check-in and feel confident you are getting more financially fit each paycheck. Happy saving!