The Associated Press
DES MOINES, Iowa (AP) -- Pensions are scarce. A greater reliance on 401(k) plans means a secure retirement rests in your hands. But are you in control?
Most people don't pay enough attention to their accounts. They're also failing to build enough savings. The average 401(k) account balance for people in their 60s was $144,000 at the end of 2009, according to the Employee Benefit Research Institute.
Spending some time now thinking about a few key aspects of retirement savings will be worth the effort.
Here are four steps to help take your 401(k) off of auto pilot:
STOP GUESSING
Do you know how much money you need to retire comfortably? Even a rough idea will go a long way toward helping you set a realistic savings plan so you can reach that goal.
Only a third of workers in a recent Wells Fargo & Co. survey said they had a detailed written retirement savings plan. As a result, they aren't saving enough.
On average, Social Security will replace only slightly more than 40 percent of a recipient's pay. As a result, someone earning about $50,000 at retirement needs about $350,000 saved to maintain a similar lifestyle. In the Wells Fargo survey, the median savings of those aged 50 to 59 was $29,000.
"People are not even close to where they need to be in total savings," said Laurie Nordquist, director of Wells Fargo Institutional Retirement. "Barring a miracle, a winning lottery ticket or a big inheritance, they're going to be forced to dramatically cut back their lifestyles after retirement."
Starting point:
--Check with your 401(k) provider. Some offer calculators or online assistance to help you set a goal and figure out whether you're saving enough.
--In the alternative, try these retirement calculators from AARP and Bankrate.com: http://tinyurl.com/238dlsq or http://tinyurl.com/ycq8bbx .
GET HELP
Plenty of plans offer investment advice to their participants. But not very many people listen. Some 60 percent offer advice according to the Profit Sharing/ 401(k) Council of America, an association of companies that provide such plans. However, only 22 percent of eligible workers bother to get help.
Those who ask for assistance obtain better results. The reason? Employees who don't ask for guidance tend to have inconsistent investment strategies, an inappropriate mix of investments for their goals, and fail to periodically rebalance their portfolios.
Starting point:
-- Ask your human resources department for a one-on-one meeting with an investment adviser from your plan's administrator. Nearly a third of all plans offer this type of consultation according to consultant Aon Hewitt. Absent that option, consider tapping into whatever help is available online or over the phone. Be sure to ask whether there are additional fees for any of the adviser's recommendations.
--Not everyone has the time or experience to manage their own investments. See if your plan offers a managed account option, which features a professional manager to make the decisions. Typically managed accounts charge a percentage of your assets as an annual fee.
--If you're not a hands-on person, you may also want to consider a target-date fund. They're designed to invest your money based on your projected retirement date and reduce the risk as you get closer. That means a fund designed for investors who plan to retire in 2050 might currently invest 90 percent of its assets in stocks and 10 percent in bonds. By the year 2040, that allocation would likely be closer to 65 percent stocks and 35 percent bonds.
ADJUST CONTRIBUTIONS
Paying down debt, saving for a child's college fund, or just trying to make ends meet sometimes pushes contributing to your 401(k) lower in your list of priorities.
Workers should save 10 to 15 percent of pay in order to build a nest egg sufficient to maintain their lifestyle. Yet the average contribution stands at around 7 percent, according to EBRI. Even more troubling, half the workers with 401(k) plans contribute 5 percent of income or less.
If you're not contributing enough, remember that any increase in your 401(k) contribution reduces your tax bill. For example, someone earning $50,000 a year and who contributes 6 percent, defers taxes on $3,000. This means paying taxes on $47,000 of income. For the average worker that will results in savings of $750.
Starting point:
-- Contribute at least enough to take full advantage of any matching funds your employer will contribute toward your retirement. The most common match is 50 cents on the dollar up to 6 percent of a worker's pay.
-- If you receive a bonus or pay raise, consider increasing your contribution percentage at the same time.
4. REBALANCE MIX OF INVESTMENTS
Although you don't need to become an investment professional, you need to understand some basics about the stock and bond markets. It's critical that you can assess the risk you're taking.
Bond funds were a smart place to park some money during the past few years. Long-term bond funds posted an average annualized return of 7.48 over the last three years. By comparison, stock investors in large cap growth funds saw their investments drop by an average 2.85 percent each year.
But now many are worried. There was a net outflow of money from bond mutual funds in November for the first time since December 2008, according to fund tracker Strategic Insight. Many believe the bond market is a bubble ready to burst because record low interest rates have nowhere to go but up.
Bond investors now face substantial long-term risk because prices for bonds with locked-in rates will drop when the Federal Reserve raises rates. That's because investors will be able to buy newly issued bonds paying higher interest.
You don't want to get stuck on the down side of that trend, said Chuck Cornelio, a retirement plan executive at Lincoln Financial Group, an insurance and financial services company.
Many stock-shy investors also hold significant amounts of their portfolios in cash. It's safe, but you earn next to nothing. The average yield on a money-market savings account remains below 1 percent.
"There is a stupendous amount of money sitting in cash in money market instruments and even inside 401(k) accounts and other retirement plans," Cornelio said.
The stock market has rebounded in recent months, but is still some 20 percent below where it stood in 2007 prior to the recession. The positive momentum in the stock market, coupled with the possible decline in bond values means it's an ideal time to review how your investments are allocated between stocks and bonds.
With bond and cash returns so low, that leaves stocks "the only game in town," says Phil Orlando, chief equity market strategist for Federated Investors Inc., an investment management firm in Boston.
Starting point:
--Evaluate the performance of your funds. If you've been shunning stocks, consider whether that's the wisest allocation of your resources.
-- Orlando sees the market rising as much as 30 percent over the next couple of years. If the recovery takes hold and the economy picks up steam, you'll want to increase your stock allocation ahead of increased corporate earnings which should be reflected in rising stock prices.
-- Periodically reassess your risk. At least once a year evaluate whether your circumstances, or the market, has changed and whether you need to make adjustments.
Published: Thu, Dec 16, 2010
