Wednesday, May 22, 2013
In today's Money Matters, whether you are about to enroll in a 401(k) or already are participating in your employer’s plan, here are seven things you should do right away:
1. Figure out your retirement date and how much money you should aim to save. At what age do you plan to retire and how much money are you going to need to live on after that? Use online calculators or work with a financial adviser to do the math, but realize the answer you get may not be set in stone because you’re likely to experience many changes between now and when you retire — unexpected windfalls, unforeseen expenses, changing retirement dreams, new health concerns, shifts in income and more. Even so, you need to know where you’re aiming. In fact, it’s foolish to undertake any long-term project without some idea of your desired outcome and saving for retirement is no different.
2. Set a monthly household budget. Don’t just pick an arbitrary amount to contribute to your 401(k) account. If you go with the default automatic enrollment percentage or the amount needed to get the full employer match — if that’s a benefit your employer offers — you’re still probably not contributing enough to get you where you want to go. Instead, decide how much you can afford to contribute, and the best way to do that is by setting a monthly budget. Make retirement savings a high priority within your budget, even if you’re young. It may seem difficult to forgo entertainment and shopping, but those are areas that can be easily trimmed.
3. Set an annual calendar reminder to reassess your contribution level; try to increase it every year. If you’re going to accumulate enough money to fund most or all of your retirement, you’ll likely need to be putting at least 10-15 percent of your salary into your 401(k) account. You never want to pass up your employer match, but don’t stop there. Do what you can to increase your contributions each year, even just a little bit. By far, the most impactful thing you can do when planning for retirement is to save — and then to save some more.
4. Determine the most appropriate mix of investment types for you. Diversifying your account among different fund types can help protect your investments from volatility. Figure out your tolerance for risk and create a mix of investment types that fits your timeline to retirement, retirement goals and risk tolerance. Don’t follow the advice of your neighbor, brother-in-law or coworker. Everyone’s allocation should be highly personalized and what’s appropriate for them may not be appropriate for you.
5. Research the funds in your plan to figure out which will allow you to optimize your personal asset class allocation. Armed with your ideal mix of investment types, research and analyze the funds available to you within your 401(k) plan. Look at fund manager history and longevity, fund long-term and short-term performance relative to peers, the fund’s Morningstar rating, how well a fund stays true to its plan documents and how volatile it’s been through market instability.
6. Set calendar reminders to rebalance quarterly or biannually. You worked to create an appropriate mix of investments, and now you’ve got to keep it. As market changes favor one fund type or another, you’ll gradually drift away from your original allocation and your account becomes unbalanced. So, a few times per year, you have to put it back in order.
7. Start another savings account so you’re never tempted to dip into your 401(k). Down the line, you may want to “just borrow a little’ from your 401(k) savings. Doing so could bring about several negative consequences, including penalties and taxes. And you’re shooting yourself in the foot twice — losing the money you've withdrawn and losing the returns you will no longer be getting. It pays to build a separate “rainy day” account instead.