A recent study from Schwab Retirement Plan Services found that “saving enough money for a comfortable retirement is the most common financial stress inducer for people of all ages.” Some 40% of survey participants stated that building adequate retirement savings was more stressful than the prospect of losing a job.
It’s hard to blame them. Watching that nest egg grow bit by bit over the course of several decades can be a challenge. And when your main retirement savings vehicle sputters and stalls, performance-wise, it’s difficult to know whether it might be time for a tune-up — or if you are better off leaving it alone.
If your plan is underperforming, and your balances are lower, it could be time to take some specific steps to correct the problem, and get that plan moving in an upward direction.
To get you motivated, MagnifyMoney reached out to finance and investment experts for effective strategies to turbo-boost those flatlining 401(k) plans. Here’s a look at what they said:
Kick it into overdrive when you hit 50.
The more cash you steer into your 401(k) plan, the more money you have working for you toward your retirement. That’s important, as compound interest builds more retirement wealth with more money in your 401(k) plan. “That’s why you need to take advantage of the 401(k) plan catch-up contribution,” says Shanna Tingom, co-founder and a financial planner with Heritage Financial Strategies, in Gilbert, Ariz. In a word, catch-up contributions allow retirement savers, usually older ones, to increase their 401(k) contributions.
Catch-up provisions enable plan participants who hit the 50-year-old mark before the calendar year is over to contribute extra “catch-up” 401(k) plan contributions on a pretax basis. In 2016 and 2017, for example, the catch-up limit stands at $6,000, in addition to the standard contribution limit of $18,000.
As Tingom puts it, “Too many people forget to increase their contribution when they turn the big 5-0.”
Get more aggressive, especially when you have more than 10 years until retirement.
The older investors get, the more conservative they may want to become with their retirement investments. But that could be a mistake, as Americans live longer and healthier lives and could need their nest eggs to last for decades beyond retirement. Forrest Baumhover, a fee-only financial planner with Westchase Financial Planning in Tampa, Fla., says he often sees retirement savers getting too conservative with their investments.
“You’ve got to look at your investment goals, and make sure your 401(k) selection matches those goals,” Baumhover advises. “Many people leave their money in the default money-market accounts and wonder why their plan performance isn’t going anywhere.” Studies show that investors who steered $100,000 into the Standard & Poor’s 500 stock index in 1987, would have earned over $1 million 25 years later. But a similar investment in the Barclays U.S. Aggregate Bond Index would have only accumulated $560,900, according to The Wall Street Journal, citing data from Morningstar.
Yes, stocks do represent a higher risk than bonds — the S&P 500 fell by 38% in 2008 — but historically, stocks make up the loss, and then some. Of course, if you are within a few years of retirement, it could be unwise to invest your entire portfolio in riskier stocks. Speak with a financial adviser who can help you determine the right mix of investments for your age, risk tolerance, and time horizon.
Keep a sharp eye on expensive fees.
Make sure the funds you are selecting are low cost, says Jeremy Torgerson, a money manager at nVest Advisors, in Brownsville, Texas. “Every 401(k) fund list should have a chart of the expense ratios of each fund,” Torgerson says. “Excessive fund fees — anything over 2%, especially — can really drag down your return over several years.” According to a 2014 study by the Center for American Progress, which cites government and industry plan data, the average American career professional loses $70,000 due to excessively high 401(k) plan fees over the course of their working years.
“The corrosive effect of high fees in many of these retirement accounts forces many Americans to work years longer than necessary or than planned,” the report states. Aim for low-cost exchange-traded funds, or index funds, which track major investment benchmarks, like the S&P 500, and offer management fees of well under 1%.
Get professional advice.
Too many people go it alone on with their 401(k) plans, and thus make poor choices on where and when to invest their money, warns Ed Snyder, a certified financial planner with Oaktree Financial Advisors, in Carmel, Ind. “An advisor can help you make choices and to stay the course during times of market volatility when you may have otherwise bailed out on your investments,” Snyder says.
The data backs up that sentiment. According to Vanguard Funds, a financial adviser using Vanguard’s own “best practices” can add 3% in net portfolio returns annually to an average investor’s portfolio. At 3% each year, for 30 or 40 years in the workforce, that can added hundreds of thousands of dollars to a 401(k) plan participant’s retirement savings.
And the good news is that hiring professional help doesn’t mean you necessarily have to fork over a percentage of your investment returns forever. There are low-cost alternatives to traditional financial advisers. You could hire a fee-only planner who charges on an hourly basis, or seek out services like Betterment or Wealthfront, which offer retirement investment advice at a fraction of the cost of traditional investment advisers.
Learn when to do nothing.
There’s a lot to be said for the vaunted “buy and hold,” long-term investment model. With this model, 401(k) savers (ideally working with a good money manager) choose several appropriate, low-cost mutual funds that fit their risk profile, their investment goals, and their asset allocation needs, and let the funds grow without worrying what the stock market is doing. Time and the miracle of compound interest are great retirement portfolio builders — if only 401(k) savers would leave them alone to grow, without buying and selling in an effort to time the markets.
Clearly, Americans are having problems getting their 401(k) plans on the performance fast track. Fix that issue by using the tips above to get your retirement plan into higher gear — the sooner, the better.