Saving for retirement is the most boring thing you can imagine. You set aside money, don’t look at it, and hope it grows. Employers know this, which is why 401(k) and 403(b) accounts are so popular.
401(k) plans are sponsored by corporations and other employers, while 403(b) plans are offered by non-profits, medical facilities and educational institutions.
Though they do have a few differences, 401(k) and 403(b) accounts both help you accumulate savings without worrying about high fees or continuous tax deductions. These are the most common types of plans offered by employers to help you save and chances are you probably have one.
Whichever type you have, let’s take a look at 7 tips so you can make the most of your retirement plan.
1 – Go Beyond Target Date Funds
Retirement planning requires you to choose how you invest your money. Target Date Funds are one popular option, as they allow for strong growth early on, with increased security over time. This type of fund begins with a stock-heavy investment plan, but shifts to bonds as you get closer to retirement.
While Target Date Funds are an easy way to invest, they may not be the best way to prepare for retirement. Target Date Funds work well for those with relatively small balances. However, if your balance is larger, you could end up paying a lot in hidden fund fees, and the glide path may not fit your retirement goals or match the market ups and downs.
If you have larger balances, individual funds are worth a look. You may find less expensive funds that meet your goals and you have more control over your funds as markets change.
2 – Lose the Stable Value Fund
Stable Value Funds offer investors a conservative way to add an income stream to their portfolio. Stable Value funds may have higher yields than money market funds, with little to no additional risk. However, Stable Value Funds offer you cash and not much else.
The problem is that Stable Value Funds do not have much growth potential, so the only benefit is the interest earned. While getting extra cash is great, you want to make sure that your long term funds are doing more than just accumulating interest. So, in order to mix things up and diversify your portfolio, consider a short term bond fund instead.
3 – Look At Overall Plan Fees
401(k) and 403(b) account fees can take a sizeable chunk out of your retirement funds. Each year, look for an annual disclosure that outlines all of the fees you’re paying. Though there’s not much you can do about them, it is good to keep yourself informed. Knowing how much of your retirement goes towards fees could affect how you choose to invest in the future.
4 – Check Out Your Company’s SPD
Every company that offers 401(k) or 403(b) plans must provide employees with a Summary Plan Description, or SPD. An SPD provides an outline of your plan’s benefits and describes exactly how your plan works. Also, it’s one of the most boring reads you will find. Fortunately, they are not terribly long.
Like plan fees, there’s not much you can do to change the information in your SPD, but you should always be well-informed on how your retirement funds are allocated.
5 – Always Meet the Company Match
As an incentive to retain good workers, many companies are willing to match the amount you put into your retirement account. The company can choose any amount they wish, which is why some plans are better for you than others. A greater match means more money for your retirement.
While it’s not necessary to exceed your company match (as the company will not contribute anything beyond that point), you should always meet it. When a company matches your contributions, it is literally free money for your retirement. There is nowhere else you can get a 50% – 100% return on your investment, so you should absolutely take advantage of the opportunity.
6 – Increase Your Contributions When You Turn 50
When you’re young, it can be difficult to meet the IRS maximum allowable contribution. Maybe your income isn’t high enough or you have other spending needs.
Fortunately, when you turn 50, you have the option to add more. And this is a good time since you are probably earning more, the kids may be out of the house, and you have more control over where your income goes.
Retirement plans do allow for these “catch up contributions.” This means that once you turn 50, your contribution limit increases by a set amount, determined by the IRS.
7 – Don’t Take Out a Loan
Since the money in your 401k or 403(b) account is yours, you technically still have access to it before you retire. That said, there are rules for when and how much you can take funds out. If your plan allows it (some don’t), they generally allow a loan of up to 50% or $50,000 of your vested balance, whichever is less.
However, since you are “borrowing” from your 401k or 403(b), it is treated as a loan. This means that you will need to pay it back with interest. Needless to say, taking out a loan from your account slows down growth and impedes your ability to hit your retirement savings goals on time.
This is my number #1 pet peeve about these accounts. No matter how you try to justify it, there are very, very few times that these loans are helpful. Taking out a loan generally speaks to a bigger spending and budgeting issue that needs to be controlled. Be sure to exhaust EVERY other avenue before lending to yourself.
The Bottom Line
Careful saving is not a fast route to amass a large nest egg, but it is the surest. And it goes a long way toward building a stress-free retirement.
The better you’re able to maximize your savings today, the more financial security you’ll buy yourself in the future. That’s why it is so important — no matter the type of plan your company offers — that you contribute as much as you can afford and take full advantage of your opportunity to put money away for the future.
Doing so will put you on your way to a comfortable retirement at a time in your life when you most certainly deserve it.
Are you looking for personalized advice to improve your retirement accounts? Jumpstart your savings and debt management strategy today with Pathfinder Planning!