There’s so much to love about a
First, there’s all that free money. Ninety-five percent of employers currently make
Then there’s the fact that
With so much going for them, it’s no surprise that most workers have come to embrace
But enrolling in a
With that in mind, here are some pointers to help you maximize the power of your plan.
- Get in early.
- Fund up to the limit.
- Be careful of going on savings autopilot.
- Don’t let a new job torpedo your old 401(k).
- Diversify. Diversify. Diversify.
- Think before you borrow.
- Consider a Roth 401(k).
- Take advantage of catch-up contributions.
- Scrutinize the 401(k) before you’re hired.
- Cash out wisely as a retiree.
1. Get in early.
Enroll in a
When you’re young that starting salary may feel thin enough as it is, so diverting money into a
But the biggest windfall is the employer match, not tax breaks, says David Foster, a fee-only Certified Financial Planner in Cincinnati.
“To heck with the taxes. If your employer matches 50 cents on the dollar for your first $2,000, and you get $1,000, that’s a 50 percent return in year one. Nothing matches that.”
What to do if you’ve procrastinated? Don’t give up. Enroll pronto and help make up for lost time by contributing more than the minimum amount required to trigger your employer’s match.
2. Fund up to the limit.
The amount of money you can put into a
Today, many earners fall far short of those limits. In fact, just over a third of individuals who do save in a
If the maximum seems too rich for your budget, then work toward it methodically.
“Acclimate yourself to saving,” says Dee Lee, a Certified Financial Planner and author of “Women & Money.” “It’s like working out. If you go in and try to do it all in one day, you’ll be so tired you’ll never do it again. But if you do a bit everyday, you’ll be able to do more. Saving in increments won’t hurt, especially if you’re new to it. And, over time, success breeds success. You’ll find that saving money can be addictive.”
3. Be careful of going on savings autopilot.
It’s become so important for people to save for retirement that many employers have begun to introduce automatic features to
This is all very well and good, but your company shouldn’t have to play the parent. After all, while mom and dad have had your best interests at heart, they may not have always made the right decision for you. So, too, with automatic
“If a person is automatically enrolled, they tend to just go with the program. They don’t contribute enough. You want to make sure you qualify for the full match,” says David Wray, executive director of the PSCA.
Plans that automatically enroll wage-earners generally divert 3 percent of their salary into the
What’s more, workers who make the effort to sign up for a
While it may be reassuring to know your plan isn’t taking risks with your money, it’s a big mistake to assume safety comes without pitfalls. So make the effort to boost contributions and select investments based on your personal retirement goals.
4. Don’t let a new job torpedo your old
It’s ironic. Workers often leave jobs to move to more profitable pastures. But when they do, their retirement savings take a big hit. According to Hewitt Associates, a whopping 45 percent of workers leaving their jobs cash out of their
That’s a very expensive mistake. Here’s why: Taking distributions from a
Oops. You didn’t roll over into an IRA? It’s not a lost cause.
You can still move
“It will be reflected like a wage withholding. Therefore, because that 20 percent was withheld, it will reduce the amount you owe or entitle you to a greater refund,” says Mark Luscombe, principal tax analyst at tax law publisher CCH.
5. Diversify. Diversify. Diversify.
Financial experts agree that the best way to hedge against risk is to diversify so that you own a variety of stocks and bonds. That means paying attention to funds — and company stock — that may be in your plan.
“Asset allocation is the most important thing,” says Dick Bellmer, chairman of the National Association of Personal Financial Advisors.
That’s a message more employees need to take to heart. These days, plans boast on average 19 funds, according to PSCA. But that doesn’t mean workers are necessarily spreading their risk. According to Hewitt Associates, workers generally invest
One easy way to ensure that your investments are diversified is by investing in lifestyle funds, which automatically adjust holdings depending on age and retirement goals. Planners recommend them as a great way to get started, especially for younger workers who need help picking investments. However, as you approach retirement, you’ll need to tailor your investments to your personal goals.
And tread lightly if your company contributes matching funds exclusively in their stock, or if your shares have gone up. Those investments could quickly make up a good chunk of your
“Personally, I like to see no more than 5 percent,” says Bellmer.
Many workers need to take this limit to heart. On average, company stock makes up 24 percent of
If you want to rebalance your shares, there’s good news. It’s becoming easier to diversify. Employers may make you wait a certain period of time to do so, but 46 percent of plans that make matching contributions exclusively in company stock let employees diversify those shares at any time. That’s up from the 15 percent who did so back in 2001, according to Hewitt.
6. Think before you borrow.
Ideally, you’ll leave your
Try to resist the temptation. “I think one of the most harmful things you can do is take a loan against your
If you must borrow, beware of the pitfalls and make an informed decision.
First, scratch that notion that you’re paying yourself back. When you take a loan from your
Another pitfall: Some employers won’t let you make contributions until you pay back a loan.
Next, you don’t have an eternity to make good on the loan — just five years in most cases. If you lose your job or quit, you’ll put yourself at further risk. That’s because employers can allow you to keep repaying the loan, but they frequently don’t, experts say. The means your outstanding balance will be subject to income taxes plus the early withdrawal penalty.
Then there are fees. Seven out of 10 plans charge a one-time loan fee that can range from a modest $3 up to $100, according to the PSCA. And a quarter of programs charge an annual service fee on top of that.
With so many hazards, it’s not surprising that financial advisers often recommend borrowing money somewhere else. A home equity loan is one popular alternative, since interest is generally deductible and won’t be subject to time limits or put you at risk of defaulting if you lose or change jobs.
Or don’t borrow at all.
7. Consider a Roth
You may not be aware of it, but employers have been busy rolling out a new addition to retirement programs: the Roth
As their name suggests, these new products blend elements of both a traditional
Here’s the lowdown. Roth
For instance, the tax treatment makes Roth
“If you’re in the 15 percent or other low bracket you might consider the Roth
If you have no idea what tax bracket you’ll be in when you retire and you want to hedge your bets taxwise, you can participate in both plans as long as the combined contributions don’t top the total $15,500 limit ($20,500 over 50).
8. Take advantage of catch-up contributions
Worried about hitting your retirement goals? Well, if you’re 50 or older, you get even more opportunities to save, thanks to so-called “catch-up” contributions. These allow you to chip in $5,000 more than the maximum. That’s not including employer contributions, either. In fact, 28 percent of companies match funds on employee’s catch-up contributions.
What’s that extra bit worth? Try this: A 50-year-old saver who stashes an additional $5,000 a year and earns 8 percent annually will have saved an extra $78,000 by the time he or she is 60.
9. Scrutinize the
401(k) before you’re hired
How many times have you looked for a new job and forgotten to ask about benefits?
That’s understandable. After all, most of us are more worried about putting our best foot forward. Salary demands loom large, and we might ask if there’s a
“What’s the current match? Has the company raised or lowered it in the last few years? What are the investment offerings? Who runs the plan? No one thinks to ask those questions, but they’re prudent to ask,” says Scarborough. “I’ve heard of people getting the job and then they think to ask.”
To be sure, the last thing you want is a nasty shock of, say, finding out you have to wait a long time before you can start contributing. Ditto for unusually long vesting periods. (On average,
10. Cash out wisely as a retiree.
A lifetime of diligent saving and careful planning has reaped big rewards and your
But your job’s not over. Tapping into your money requires navigating rules Kafka would love. Rush to grab cash and you could be making an expensive blunder. Ed Slott, CPA and author of “Your Complete Retirement Planning Road Map” says that between state and federal taxes, estate taxes and mistakes withdrawing money, up to a whopping 70 percent of assets could wind up going to the government. His message: Pay as much attention when withdrawing funds as you did accumulating them.
Generally, you can start taking distributions from your
So, how to get at those funds when the time finally hits? The answer boils down to three basic choices: Roll it over, lump sum or leave it alone.
If you want options, rolling it over into an IRA may prove to be your best choice. After all, you put yourself in control of the assets and can invest that IRA any way you want. Plus, you’ll defer taxes until you absolutely have to take the money out, or until that first required distribution hits at age 70½. If you’re over 55 but not yet 59, be careful. If you quit, get fired, or leave your job at age 55 or older, you can get
You also want to be prepared to make decisions about how to invest your savings if you plan to move it to an IRA.
“The drawback is you move to an IRA and leave it in a money market fund or choose some crazy investment,” says Harold Evensky, a Certified Financial Planner in Coral Gables, Fla., and author of “Retirement Income Redesigned.”
Taking a lump-sum distribution means cashing out completely. Financial pros advise against this for two reasons. First, raiding your
If you like your
Finally, bear in mind that you’ll probably do best seeking the advice of a financial adviser with experience in retirement planning before you withdraw funds. There may be money that’s easier and cheaper to get out of a brokerage account or IRA before touching the
Are you worried about having enough money to retire someday? Or, do you have a plan of action? Share your story