When planning for retirement, it’s easy to say you will save more money, follow a budget or even invest. Yet, if there is no set plan in place, it can be the perfect procrastination recipe which often leads to financial stress.
Fidelity Investments, a leading workplace benefits provider, reported in their second quarter Retirement Analysis that a record number of account balances continued to increase across more than 30 million retirement accounts. The average 401(k) balance rose to $106,000 and the Individual Retirement Account (IRA) balance rose to approximately $110,000, which were both a two percent increase from the first quarter of 2019.
This is good news. It reflects the opportunity to impact the future. More and more American workers focus on funding their retirement, especially since most of us aren’t inheriting the Taj Mahal, some may be pensionless or fear Social Security benefits will change.
Here are some smart ways to increase your 401(k) balance.
Stay the Course
Retirement planning is for the long haul. Your money has to last approximately 20 to 30 years in retirement. Step one is to set a course – How much do you need to save to maintain your desired standard of living through retirement? That roadmap serves as a financial GPS (Global Positioning System). The second step is proceeding with your plan even when times get tough. Fidelity Investments reports that those who remained invested in their 401(k) plans for the 10 years following the Great Recession of 2008 saw their balances grow fivefold from an average balance of $59,900 to $305,900.
Start with the Defaults Then Adjust to Fit your Needs
How do you start? Many 401(k) plans automatically enroll new employees at a contribution rate of at least four percent and the funds are invested in a target date fund or managed account. This is to help reduce the chance the employee does nothing due to the uncertainty of how much to contribute or given a menu of unfamiliar investment options. 401(k) plans offer many benefits including tax advantages and providing you a “forced savings” plan by getting the funds into your retirement account before you have a chance to spend them.
Time Is One of Your Greatest Allies
The power of compound interest comes from your investment generating earnings which are reinvested to generate their own earnings. The earlier you start the better. For example, a 25-year-old investing $75 per month accumulates more funds by age 65 than a 35-year-old investing $100 a month – the projected accumulations at six percent annual return are approximately $149,000 versus $100,000.
Meet Your Employer’s Match
At a minimum, take advantage of matching contributions. For example, an employer might match 50 percent of contributions up to five percent of your pay. If you contribute $2,500 or five percent of your $50,000 salary, they’d match it with $1,250. That’s a 50 percent return on your contribution.
Increase your 401(k) deferral. Fidelity Investments reported that the average deferral rate is 8.8 percent. The maximum employee deferral limit for 2019 is $19,000 and workers age 50 and older can save an extra $6,000 for retirement. You may need to save more than the 401(k) limits to achieve your retirement goals. There’s no limit to saving and investing after-tax funds.
High Frequency Job Changers
Job hoppers may find they’re ineligible to participate in a 401(k) plan (e.g. the plan might require to be employed for at least 12 months). Their option might be to fund Individual retirement accounts (IRA), which have lower maximum contribution limits of $6,000 plus a $1,000 catch up if age 50 or older.
Do you have scattered retirement accounts possibly from former employers? Consider herding them up and consolidate them to an IRA or your current 401(k) plan. This reduces clutter and helps you give your retirement assets the attention they deserve.
Minimize Retirement Leakage
Avoid borrowing from your 401(k) plan. These funds are for your future versus your personal ATM. Repayment amounts can be expensive – a maximum of a five-year repayment period. Also, if you change employers, unpaid 401(k) loan balances might generate a tax bill. Fidelity Investments reported that approximately one in five participants has a loan balance and some of the common reasons are paying down debt (31 percent), home improvements (24 percent), buying a home or refinancing (21 percent) and paying outstanding bills (19 percent).
Ask for Help
Congratulations for recognizing the need to save money for retirement. The process can be overwhelming and it’s tempting to bury your head in the sand. Your plan might have 20 investment options. How much in savings is enough given the uncertainties of investment returns, inflation rate, taxes, life expectancy, other sources of retirement income, and the challenges of aging? How do you avoid common retiree regrets such as starting too late or saving too little? Don’t be afraid to ask for help. Use your resources including DIY (do it yourself) calculators and allocation tools, plan representatives and trusted advisors, and never lose sight of the goal in mind.
Secure your future wisely.
This article can also be viewed at the Reno Gazette Journal.