Four 401(k) Must-Dos Before 2016
Maximize your retirement fund contributions, increase them next year, and use a managed strategy for growing wealth.
With less than two months to go in 2015, it is the time of year when our firm kicks into what we call the retirement investing “year-end-sprint.” That means it’s time to make sure our clients have a number of critical retirement planning “must-do’s” checked off their lists before the champagne flows on New Year’s Eve. Here are just four important retirement investing items to add to your own year-end must-do list:
1. Max Out Your Retirement Plan Contributions. Now is the time of year to review how much you have saved in your company’s retirement plan, and then save some more. If you haven’t reached the maximum contribution limits yet, you have two months to do so. For traditional 401(k) and 403(b) plans, the maximum contribution you may make in 2015 is $18,000. If you have a SIMPLE-IRA at your company, the maximum contribution you may make is $12,500. Those limits are indexed to inflation, but will stay the same in 2016.
If you are over 50 years old, you are eligible to make additional “catch-up” contributions. The “catch-up” amounts are $6,000 for 401(k) and 403(b) plans, $3,000 for SIMPLE-IRAs. All of your contributions have to be made by December 31, 2015. So, a little planning now can help you get the most out of your company’s plan for 2015.
2. Get The Full Match. If you are not yet maxing out your retirement plan contributions, then make sure you are at least contributing enough to receive the full company match. For example, if your company matches 50% of the first 6% of your contributions, make sure you are contributing at least 6%. One of the cardinal sins of retirement investing is to leave free match money on the table. Don’t miss out on the match; you will never get that money back.
3. Escalate Your Contributions Next Year. We believe most people will need to save between 12% to 15% of their annual income in order to properly fund their retirement. To help people reach that savings goal, many 401(k) plans have added a feature called auto-escalation. Auto-escalation automatically increases your contributions each year by a certain percentage unless you opt-out.
Unfortunately, many auto-escalation programs are too low and slow -- meaning the plan starts investors with a very low savings rate such as 3%, and escalates the savings rate by only 1% per year. For most people, that’s not nearly enough. We like to see auto-escalation programs start retirement investors at 6% and increase by 2% per year in order to have a meaningful impact.
If your company’s 401(k) plan does not offer this feature, then do it yourself by increasing your savings rate each January by 2% until you reach the 12% - 15% objective. Over time, you’ll barely notice the difference in your paycheck.
4. Use a Managed Strategy. The market swoon in August/September was just a reminder that corrections in the stock market are actually the norm, not the exception. And research shows the average retirement investor is very likely to let their emotions get the best of them during periods of heightened market volatility, which usually results in selling at the peak of the pain. Unfortunately, doing so may cause irreparable damage to your retirement savings.
If you are anything but a skilled, experienced investor, consider using a managed account strategy, target date fund, or risk-based portfolio if offered in your company’s retirement plan. Research from Aon Hewitt/Financial Enginesfound that investors using some type of professionally managed portfolio experienced returns of 3.32% more per year than investors managing their own account. Over time, the compounding effect could add hundreds of thousands of dollars to your retirement portfolio.
Complete all of the above, and you not only will have made the most of your company’s retirement plan in 2015, you will have greatly improved your ability to reach a comfortable and sustainable retirement lifestyle.
Ron is the founder and CEO of ONE Retirement, an independent advisory firm focused on managing clients’ retirement assets. Follow Ron on Twitter @RonSanders.
About the Author
CEO & Chief Investment Officer, ONE Retirement, LLC
Ron is the founder of ONE Retirement, a registered investment advisory firm based in Overland Park, Kansas managing over $150 million for retirement investors. Ron's experience in the investment management industry—over a quarter century—instills him with a drive to help people attain and sustain their dreams for retirement. He started ONE to provide high-quality and highly personalized retirement and financial planning services to businesses, individuals, and families across the country.