Your 401(k) plan: 5 smart moves to make in 2020
A recent Bankrate survey showed that more than half of Americans feel they just aren’t saving enough for retirement. But for those who have fallen behind, the new year makes for a great time to take stock of your 401(k) plan and get moving on ways to set you up for greater wealth and financial security in your golden years.
A 401(k) is an employer-sponsored account that allows you to defer the taxes on your investments until retirement, meaning you can roll up more money faster. As a bonus, many employers contribute matching funds to encourage you to save, offering you free money for something that is already good to do. (Here’s Bankrate’s complete guide to 401(k) plans.)
“The biggest mistake one can make is not saving for retirement at all,” says Kevin Driscoll, vice president of advisory services at Navy Federal Financial Group. “If you’re not investing in your retirement at all, you’re leaving money on the table. Anyone can take control of their finances – it just requires proactive effort.”
Bankrate spoke with a number of financial experts to breakdown the top ways to set up your 401(k) to thrive in 2020.
5 smart moves to boost your 401(k)
Investing can be difficult, but the 401(k) is one of the easiest ways to start investing, and it’s one of the best ways for Americans to save for their golden years. Many of the actions below focus on small changes, and then you can let stocks do what they do best, go up over time.
1. Act now
The best advice according to experts is to resolve to act now, even if your contributions are modest. Many workers set up or adjust their retirement plans as the new year begins.
“The new year is a time to review retirement savings goals and make sure 401(k) benefits are maximized,” says Ed Farrington, executive vice president at Natixis Investment Managers.
Natixis surveyed Americans with access to a 401(k) and found that they understand the value of investing for the future, even if they don’t always do it.
The 2017 survey “found that millennials, for instance, are buying homes, raising families and paying off school debt. Only one in four (25 percent) is focused on retirement planning,” says Farrington. “The same survey revealed that baby boomers’ biggest regret about retirement preparation is that they didn’t start sooner.”
The more time you give your money to grow, the greater its returns are likely to be over time. Act today to get your 401(k) in order or to start investing.
2. Grab all the free cash
“To get started on a tangible level, take a look at your company’s 401(k) options,” says Driscoll. “Many companies offer an incentive match, encouraging you to invest part of your paycheck into a retirement fund. Whatever they match, put that percentage into your retirement fund – it’s free money.”
The incentive match is one of the best parts, maybe the single best, of the 401(k) plan. And the employer match is the easiest, safest money you could ever make, offering you an immediate return for doing what you need to do anyway.
Many employers will match 50 percent of your contribution and sometimes as much as 100 percent up to a certain amount. A few employers do even better than that, although many employers do not offer a match at all.
“Ensure you have contributed enough to get the full company match,” says Kirk Kinder, certified financial planner at Picket Fence Financial in Bel Air, Maryland. “There isn’t any legit reason not to get the full match.”
3. Get more aggressive
If you have a long time until you retire, you’re probably going to be better off having a portfolio that’s more aggressive. That means your portfolio will likely have more stocks in it and fewer fixed income investments such as bonds and CDs.
Over time, a diversified portfolio of stocks can return more than a typical bond portfolio. The Standard & Poor’s 500 index has gained an average of about 10 percent annually for decades. And with retirees living longer than ever, they’re going to need to ensure their investments offer a high rate of return.
Many 401(k) plans have target-date funds that automatically shift your aggressive assets into safer ones as you approach your retirement date. These target-date funds can be a good solution for investors who don’t want the hassle and headache of managing their own portfolio.
“I’m a big fan of target date funds,” says Mark Wilson, founder and president at MILE Wealth Management. “Most of these are well-diversified, wisely built, and auto-rebalanced. Unfortunately, I often find that they are too conservative.”
“Nobody needs all of their nest eggs on the day they retire, so why would you have 20 percent (or less) of your investments in stocks on the day you retire?, asks Wilson. “Retirees have a long horizon and will need to have some stocks to keep ahead of taxes and inflation.”
Wilson recommends using a target date fund that’s 10-15 years longer than when you expected to retire, because it will have a greater allocation to stocks. For example, if you would normally take a 2040 target-date fund, consider a 2050 or 2055 one instead. The extra years on the fund should help you generate a higher return and better maintain your standard of living.
4. But avoid being too aggressive
If you have a long time horizon, it can be smart to get aggressive with your portfolio, but those closer to retirement should be careful, too. For retirees and pre-retirees, it may be time to shift into preserving your assets rather than trying to play catch-up.
“Yet many are focused on growing their assets – including aggressive investment strategies – rather than preserving their assets against sudden market downturns,” says David Potter, spokesperson for MassMutual Financial, citing the company’s research. “Many people may be taking more risk than they realize.”
Potter suggests that investors reevaluate their portfolio regularly to consider how they would fare if the market declines significantly.
“Typically, financial professionals recommend that retirement savers dial back their exposure to stocks as they get within five years of retirement and within the first five years after retiring,” he says. ”A steep market downturn of 20 percent or more during those periods could irreversibly reduce your income in retirement.”
5. Consider rebalancing
The various positions in a portfolio grow at different rates, and over time the portfolio can move from its target allocations. Investors should look at their portfolios to see if they need to be rebalanced. Rebalancing returns the 401(k) from its current allocation to its target allocation.
For example, if your target allocation was 50 percent bonds and 50 percent stocks, it may have grown to 40 percent bonds and 60 percent stocks over the last few years as stocks soared. By rebalancing, investors can take some of their appreciated assets and buy underappreciated assets, effectively selling high and buying low.
“Think about rebalancing your account,” says Kinder. “The stock market has done well this year so investors should sell some of the gains and buy assets that haven’t done as well.”
And a bonus – the Roth 401(k)
If you’re looking ahead a few years, you may also want to consider opening a specific type of 401(k) called a Roth 401(k). With the Roth version you pay with after-tax money, but you’re able to enjoy tax-free withdrawals at retirement. (Here are all the details on the Roth 401(k).)
Tax rates are relatively low, so now could be a good time to fund a Roth 401(k) rather than a traditional 401(k).
“With the Trump tax law due to sunset in 2025, we are facing higher rates in the future,” says Kinder. “It could be an excellent time to utilize the Roth 401(k) option and take advantage of the lower rates now. This is especially true for folks under [age] 40 or folks in the 10 percent or 12 percent tax bracket.”
Lower tax rates mean that the cost to take advantage of the Roth plan is lower, since you pay with after-tax money. Taxpayers in higher brackets may find losing their break on current taxes is more advantageous, however, and stick to the traditional 401(k) plan.
The 401(k) is an excellent vehicle to save for retirement, and the new year is a great time to join the many other workers who are securing their financial futures by saving. Many of the top moves to make are easy and painless, and some can even reward you with cash for your effort.
- 6 differences between a Roth IRA and a Roth 401(k)
- 5 ways to maximize your 401(k) plan
- 6 retirement investing alternatives to your company’s 401(k)