For most of us, a 401(k) savings plan is the best retirement planning option we have, so figuring out how to get the most out of it is important.
Here are five steps, courtesy of financial services think tank Limra, to maximize your 401(k)'s potential and increase the likelihood you'll reach retirement age with enough money to enjoy life in your golden decades.
Start saving at 7 percent and go up from there. Tom Dennis, associate managing director of Limra retirement research, says 7 percent is more than twice the 3 percent level at which many employers start auto-enrolling new savers, and the latter amount often isn't enough to get the full employer match. That's just leaving money on the table. If you start at 7 percent, you'll not only get the maximum match, you won't have so far to go to reach the 10 percent to 13 percent savings levels most retirement planning experts recommend.
Put your money in a target-date retirement fund. Dennis points out that target-date funds, which start out with more aggressive fund options, but gradually become more conservative the closer an investor gets to retirement, are generally professionally managed. "Outside of true managed accounts, which are costly, this is the most reasonable opportunity for savers to have access to professional risk management," Dennis says.
Revise annually. Most employers give workers an annual opportunity to look at their health care benefits. While you're in the human resource office taking care of that detail, Dennis suggests you also take the opportunity to reconsider your 401(k).
Don't take retirement for granted. Make your plan early and follow it. Having a vision and a goal makes saving a less onerous task. Put the plan in writing. Limra research shows that people who take the time to devise a retirement plan and write it down are much more likely to achieve their goals.
Get help. Retirement planning isn't easy. You'll be much more successful if you get knowledgeable advice, not only about your 401(k) but also about other important aspects, especially the timing of Social Security.