How to hack your 401k
Wish you could wave a magic wand and make your 401k a whole lot bigger? These three hacks come pretty close to working some magic.“Retirement is going to be long, and it’s going to be expensive,” says Liz Weston, author of “The 10 Commandments of Money.” ”You want to maximize every penny you’re saving.”
Save (even a little) more
Any idea how much you’re saving? The ideal amount is about 15 percent, says Weston, “but 20 percent is even better,” given your longevity and likely medical expenses as you age. If that sounds like a lot to sock away each pay period, do it gradually. At least get the company match if there is one. (Some companies throw in 50 cents for every $1 you save, up to 6 percent of your paycheck.)
Or increase your contribution by 1 percent per year. If you get paid twice a month and make $100,000 per year, and are in the 28 percent federal and 5 percent state tax brackets, your extra 1 percent contribution will be only $27.92 per paycheck. “Auto-increases are a powerful way to almost painlessly save more,” says Alex Benke, Betterment’s CFP®. Check whether your plan offers this.
New government rules require your 401k provider to show how much you’re paying in fees. If your statement isn’t totally clear, speak to a plan rep. Your “all-in” (total) costs should be no more than 1 percent per year of your total balance — and ideally less. What to do now: If you’re not invested in these already, switch to low-cost index funds, exchange-traded funds (ETFs), or even an inexpensive target-date fund. If these aren’t offered by your plan, ask your employer why. “Many people don’t realize that their employer has a choice in what funds they can offer,” says Benke. If index funds are available, you could do a lot worse than choosing a broad stock market fund (like an S&P index fund) and a bond index fund, if available, says Weston. The two-fund system is limited, true, but investing now is better than waiting “to learn more” and losing out on potential market returns.
What’s the right balance of equities versus bonds in your retirement portfolio? Many people use the formula of 100 minus their age to decide the percentage of equities versus fixed income. Whatever you decide, that allocation will shift as the market moves. If you’re 40 and started with a 60-40 allocation of stocks to bonds/cash, you could be at 70-30 now, which is a more aggressive allocation (i.e. you’re taking on more risk for the possibility of greater returns). What to do now: To get back to your desired allocation, you may need to sell equities (in this case) and put more money into bonds. Rebalancing is crucial to keeping returns steady.
Last, if you have a 401k from an old employer, don’t let it linger in limbo. You’re likely paying high fees on that account. Roll it over into an IRA, so you can resume saving.