No doubt many Americans have a great deal of their financial futures tied to the success of their 401(k) plans.
But how much?
Total U.S. retirement assets reached $25.3 trillion as of December 31, 2016, according to the Investment Company Institute. That’s up nearly 30% since 2012.
Retirement savings accounted for 41% of all household financial assets in the United States at the end of 2016.
The ICI also reports that Americans held $7 trillion in all employer-based D.C. retirement plans on December 31, 2016, of which $4.8 trillion was held in 401(k) plans.
With all that 401(k) cash at stake, you’d think working Americans would do all they could to grow — and protect — their 401(k) plan assets.
But the truth is, many don’t. Maybe it’s borrowing from a 401(k) — a big no-no because it can make you a target for the Internal Revenue Service and it defeats the purpose of one of the biggest and best wealth generators ever: the miracle of compound interest.
Maybe it's not investing the maximum in your 401(k) plan. Maybe it's not taking full advantage of generous employer retirement fund matching plans. Or maybe it's not setting up a strategic cushion to protect your savings against recessions.
Any of those toxic moves can put a big dent in your retirement funds. But you can fight back, protect the savings you have, and play some much-needed catch-up at the same time. Just deploy these “quick fixes” for your wheezing 401(k) plan and you'll be ready to grow your account in good times and bad.
Here’s a snapshot:
Fix #1: Know Where You Stand, and Make a Plan
Any pivot toward a 401(k) strategy shift has to start by knowing exactly where you are right now, where you need to be the day you retire, and what could happen between now and then.
That’s a huge key in protecting your plan assets, but few people take the time to figure out their retirement income needs — mostly because they lack motivation and confidence in meeting their long-term financial needs.
For example, the Employee Benefits Research Institute estimates about half of all U.S. adults are either “not at all confident” or “not too confident” in their ability to retire comfortably.
About one in four (23%) Americans told EBRI they didn’t know what percentage of their income they should save each year to live comfortably in retirement. Yes, doing the math can be daunting, but beginning to do so might be simpler than you anticipate.
In general, the rule of thumb is to have about 80% of your pre-retirement income to live on in retirement. But a better idea is to be able to count on having 100% on hand.
Inflation could go higher, Social Security may collapse, the markets could go through another massive collapse, and you may live long enough that health care is a major and expensive issue.
To accurately calculate your future retirement income needs, you need to take six key factors into consideration:
- Starting balance - How much do you have now?
- Annual contributions - How much can you afford to contribute every year? And how much do you estimate that amount will grow in time?
- Current age - How old are you? The younger you start, the easier it is to build a massive retirement account.
- Age of retirement - When do you plan to retire? The longer you have to take advantage of compund interest, the bigger your gains will grow.
- Estimated duration of retirement - How long do you plan to live? I know nobody likes to think of their own mortality. But you need to know how many years your savings will need to support you. Healthcare and assisted living communities cost money. And people are living longer than ever. Guess how long you'll live and add at least 10 years just to be safe.
- Market health during savings period - Don't count on all sunny days. Plan for below average performance to come out on top no matter what happens.
Factor all these in. What you come up with could be the most important number you’ll ever calculate for the rest of your life.
Fix #2: Maximize Employer 401(k) Matching Plans
If you have not done so, immediately contact your company’s human resources office or the “go to” staffer who acts as the intermediary between you and your company’s 401(k) plan sponsor and ask that person what the company’s policy is on 401(k) matching. Then ask how you can maximize your savings to fit within the parameters of that program.
If you’re a new employee, make sure you sign up for your company match right away — on your first day on the job, if possible. By procrastinating, you’re taking money off the table.
For example, 53% of Vanguard 401(k) plans (one of the biggest 401(k) plan sponsors in the U.S.) allow employees to contribute to the 401(k) plan immediately after beginning their jobs.
In other situations, you may have to wait three months to one year to benefit from company matching — so know your employer’s timetables.
One other tip on company matching: Many firms offer profit-sharing contributions to 401(k)s regardless of how much cash you have in your 401(k) plan.
According to one recent study, about 75% of employers make discretionary contributions, usually based on longevity at the firm, of up to 4% of your salary. So if your company provides a profit-sharing plan, find out about the eligibility restrictions and what you need to do to get in on the action.
Fix #3: Maximize Your Contributions With a Stronger, Streamlined Household Budget
A hockey player who takes his eye off the puck will always lose a step to players like Hall-of-Famer Wayne Gretzky, who always knew where the puck was and where it was going to be.
The same goes for your 401(k) plan — don't take your eye off it. Keeping track of your dollars and cents is the first step to rebooting your 401(k) plan. In fact, it’s the bedrock on which everything else rests.
If you don’t pinch pennies in the beginning, you’re squandering a golden opportunity to make more money down the road. It’s what economists call "compound interest" — when you earn interest not only on your original investment but also on the interest it has already earned. Through compounding, your investment assets grow, slowly at first, then at greater speeds as the years go by.
Consider a monthly investment of $300. Given a 9% rate of return, that $300 monthly investment turns into $22,627 after five years, $58,054 after 10 years, $200,366 after 20 years, and an astounding $336,337 after 25 years. In fact, the longer you leave it alone, the more the interest "compounds."
No wonder Albert Einstein referred to compounding as the most remarkable mathematical discovery ever. He's even said to have called it the "eighth wonder of the world." Economists may have a dry, bureaucratic name for it, but I prefer calling compound interest your very own personal moneymaking machine.
To get started on the budget front, only put away what you can each month. Another night at home instead of dining out, a few degrees lower on the thermostat in the winter and a few higher in the summer, and other household cutbacks can save hundreds per month — and that’s hundreds you can pop into your 401(k) to start growing right away.
Fix #4: Make Sure to Diversify Your 401(k) Portfolio
Any investment portfolio should be able to weather the demise of one stock, unless it’s a stock that comprises a hefty part of your portfolio.
Always diversify your investments so that you’re not too reliant on any one stock, bond, or mutual fund. If it collapses in a hurry, you can, too.
By allocating a mix of stocks, bonds, and mutual funds in your 401(k) portfolio, you can minimize losses in one area and even make them up simultaneously in another.
The best way to protect your assets in times of market volatility is to have your money spread around among different investments in different industries. Don't think you're diversified if you own stock in 10 different communication companies. You're still subject to massive losses if that industry takes a turn for the worse.
The idea is a simple one — when your investments are diversified, or spread across different asset classes or types of securities, they work together to help reduce risk.
So go ahead and enjoy the benefits of slow and steady blue-chip stocks along with potentially higher-flying growth stocks. Mix in some international stocks, and diversify amongst different bonds. Real estate and commodities have also been shown to enhance portfolio performance.
Ultimately, how much to allocate between stocks, bonds, cash, and other asset classes will all depend on your investment objectives and risk tolerance. Once you've established an appropriate asset allocation, make sure you stick to it and rebalance regularly (at least once a quarter) to ensure your portfolio stays on track.
Fix #5: Max Out on Contributions
In 2018, 401(k) plan participants can contribute a maximum of $18,500 to their plans.
Sure, it’s not always easy to find the cash, but contribute as much as you can, nonetheless, because the more you pour into your 401(k) fund, the faster — and higher — your plan assets will grow.
Also, know you can find money in unforeseen places. For example, there’s no rule that says you have to spend a raise, bonus, or inheritance (also known as “windfall” money). Instead of spending it, redirect it into your 401(k) plan, and watch your plan assets grow.
A quick note: If you’re 50 or older, you can make so-called catch-up contributions. Recent congressional pension reforms provided that 401(k) plans could allow people who are age 50 or older to save more by taking advantage of a "catch-up" provision.
So if you are age 50 or older and your plan allows them, you should make these additional pre-tax contributions to your plan — up to $6,500 this year.
Get Rebooting — the Sooner, the Better
Rebooting your 401(k) plan isn’t easy, but it is certainly doable.
Follow the tips above, and watch those quick fixes give your 401(k) plan a new lease on life.