Scrutinize 401(k) fees. All sorts of fees—including administrative, transaction, and investment management charges—can whittle away your nest egg over time. If a worker invests $5,000 annually in a 401(k) over a 35-year period and pays 1.5 percent of the account balance in fees (using constant 2008 dollars and assuming an after-inflation return of 4.9 percent annually), he will have $345,000 at retirement. If the same worker can cut expenses to 0.5 percent of the account balance, his nest egg will be $423,000 at retirement—$78,000 more. But keeping costs low can be difficult because not all 401(k) fees are fully disclosed. Many financial advisers think a reasonable rate to aim for is an expense ratio of 1 percent or less. Low-cost index funds are typically a good way to invest in stocks at rock-bottom prices.
Determine your risk tolerance. After losing $2 trillion in their retirement accounts this year, consumers have a right to feel a little spooked about keeping their nest eggs in the stock market. The key to weathering this financial crisis is to find a level of risk in your portfolio that you can live with that also helps you build wealth for retirement. "People in this environment tend to invest to extremes—too much risk or too little risk—and you pay a price both ways," says Jonathan Pond, a financial planner and author of You Can Do It! The Boomer's Guide to a Great Retirement. "If you have gotten out of stocks, get back into stocks gradually. If you are 90 percent invested in stocks, don't sit there with a decimated portfolio and hope for the best. I would get back to a more reasonably diversified portfolio—about 50 percent in stocks. That way, at least you will mitigate future losses."
Rebalance your portfolio. If you were invested 50 percent in stocks and 50 percent in bonds at the beginning of the year, your portfolio almost certainly doesn't have those proportions anymore, because you have probably taken big losses in stocks. "The temptation this year is going to be to stay where you are or get rid of stocks. Most people today should probably buy stocks," says Andrew Biggs, a resident scholar at the American Enterprise Institute and a former deputy commissioner for policy at the Social Security Administration. "Whatever ratio people have, people should think about where they want to be and be proactive about getting their portfolio back where it should be."
Evaluate your target-date fund. Target-date funds are designed to automatically shift investments to become more conservative as you age. But these fix-it-and-forget-it funds are hardly one size fits all. A Watson Wyatt analysis of various target-date funds showed that allocations to equities for employees 10 years from retirement varied widely—from 40 percent to 80 percent. And on the day of retirement, equity allocations ranged from 20 to 65 percent. Ask your plan administrator how much of your fund is invested in the stock market at various ages. If that's not a level of risk you can live with, pick a different fund.
Pay off your mortgage. The benchmark interest rate on a 30-year fixed-rate mortgage has dipped as low as 5.17 percent, according to Freddie Mac. If you're getting a significantly higher return in the stock market (very doubtful right now), it might make sense to keep your mortgage going into retirement. But if you're not an investment wizard or don't want to take the risk, start prepaying your mortgage principal as you approach retirement. "You get an absolutely safe return by paying off your mortgage," Kotlikoff says. "If you have a 7 percent mortgage and 3 percent deflation right now, that means that you are paying 10 percent on your mortgage. Every dollar you pay [down on your mortgage principal] now is giving you a 10 percent real return."
Bump up your contributions. Face it. Without a traditional pension, the only paths to a secure retirement are to save more, cut expenses, or both. That's not easy to do when immediate expenses are demanding a portion of your paycheck before it even clears the bank. If you do manage to get a raise next year, consider diverting it to your retirement account. Says Pond: "The only sure way to create wealth is to save regularly and to regularly increase the amount of money you're saving, or live beneath your means."