With pension plans falling out of favor in the corporate world, the burden to provide for a secure retirement is increasingly falling on our own shoulders. For Americans, this means trying to figure out a way to maximize the benefit of retirement accounts such as 401(k)s. Here are a few ways to take personal responsibility for funding your retirement years:
Consider your wealth in different accounts as one portfolio. Chances are good that you have multiple accounts all holding different stocks, bonds, and mutual funds. You need to develop a way to easily merge all these numbers to give you a big picture overview of how your money is invested. Without it, you will never be able to execute an appropriate asset allocation.
Adjust your asset allocation to minimize taxes. Due to our complicated tax system, different investments are taxed at different rates. For example, long-term stock and dividends are taxed at lower rates than bond interest. By keeping your bond allocation in your 401(k) and stocks in your taxable accounts, you will effectively get to keep more of your returns due to paying less tax.
Try to petition for better fund choices in your 401(k) plan. Larger employers usually do a better job of selecting efficient funds with lower fees that aim to put a higher portion of the returns in employee pockets. Many 401(k) plans offered by small businesses contain funds that are littered with excessive fees that prudent investors wouldn't want to use. Ask your plan administrator how you can get on the committee that decides the fund lineup for your 401(k) plan. You may be able to influence the company to change the plan provider to a firm that offers funds with lower expenses.
Figure out what your 401(k) plan actually offers. Many plans are starting to include automatic yearly contribution rate increases, which is a great feature because it encourages you to save more of your paycheck each year. Other plans allow in-service distributions, which allow you to escape paying for high-cost funds by transferring some 401(k) assets to an IRA while you are still working for the same company. There is no universal set of features that 401(k) plans offer, nor do most of the plans advertise all of their options, so it often pays to do some research about all the features of your 401(k) plan.
You should contribute more. Get to know the annual 401(k) contribution limit, and do everything you can to meet and exceed that amount. Your contribution rate is the single most important factor in determining how likely you are to have a financially secure retirement. It’s certainly worth exploring whether you would be better off investing your money in a pre-tax or post-tax retirement account. But no matter what the tax treatment, every dollar you manage to tuck away for retirement gets you closer to a financially secure life without a job.
David Ning runs MoneyNing, a personal finance site that shares money moves you can make to significantly increase your chances of having a comfortable retirement. He likes to share simple changes that anyone can make, such as picking the best online savings account and figuring out whether a 0 percent balance transfer credit card makes sense.