Resolution Revolution: It's Never Too Late to Boost Your 401(k) Performance

By Clifton Linton
Writer, mPower

In this article: Do some retirement planning Get your full employer match Raise your contribution by 1% Rebalance your accounts Consider non-tax-deferred accounts Follow a budget Check your beneficiary arrangement

You might call 32-year old Morgan Hurley a great prognosticator, or at least very insightful.

In 1992, before it was widely known that the Social Security trust fund might eventually run out of money, Hurley resolved to completely provide for old age with his own savings. "I wouldn't count on any (outside) sources of retirement income," he said.

Now, even with two children to put through college one day, he's diligent about putting money in his 401(k). While he admits he didn't consciously make any financial resolutions for 2000, having a plan in place helps carry out the resolution he made at age 25 to be financially independent in old age.

While Hurley got an early start on retirement planning, it's not too late to do some of your own. Here are some resolutions that financial planners urge you to make, and keep.

Do some retirement planning

The one resolution just about all the experts we talked to agree on was: sit down and do a little retirement planning.

Hurley started planning soon after college graduation. "My goal, at a minimum, is to be able to retire at 59½," he said.

He's self-taught when it comes to retirement planning. "The closest thing I had to advice was in my first job, we had a guy affiliated with the (company) 401(k) plan who told me `being young, put everything in the market and be aggressive,'" Hurley said.

According to the Employee Benefit Research Institute's (EBRI) 1999 Retirement Confidence Survey, Americans do a woeful job of planning for their golden years. Fewer than one in 10 workers appear to be doing a very good job of preparing for retirement, EBRI says.

"People who know how much they need for retirement tend to have five times more money in their 401(k) plan than people who don't know." - Dennis Ackley Vice President, Participant Services J.P. Morgan / American Century Retirement Plan Services

Just by participating in a 401(k) plan you've already made the decision to plan for your retirement. But, that may not be enough. Now's the time to sit down and hone your strategy.

"The goal is building an adequate retirement nest egg," said Ted Benna, the creator of the first 401(k) plan.

Figure out what your retirement goals are and what it will take to reach them. Then, figure out if your goals are realistic. For instance, will a $100,000 retirement portfolio be enough to sustain you, or will you need more?

"People who know how much they need for retirement tend to have five times more money in their 401(k) plan than people who don't know," said Dennis Ackley, Vice President of Participant Services with J.P. Morgan /American Century Retirement Plan Services, citing the EBRI study.

Using calculators offered by the American Savings Education Council, you could quickly estimate your retirement savings needs in 10 minutes, Ackley estimated. Other on-line resources are available if you want to go into more detail.

You can find ASEC's on-line tools at: http://www.asec.org/toolshm.htm

If you don't participate in your company's 401(k) plan, this is a good time to join. A 401(k) plan is one of the most-powerful retirement savings tools around. You can contribute up to $10,500 in a 401(k) plan this year, before taxes, and with the automatic payroll deduction, saving becomes relatively painless and hassle-free. Comparatively, you can only save $2,000 a year in an IRA.

Get your full employer match

Next on the list: get the full 401(k) matching contribution from your employer.

"It's free money," said Barbara Adamson, certified financial planner with Boone Financial Advisors Inc.

Here's how it works: Suppose your company offers a typical matching contribution of 50 cents on the dollar, up to the first 3% of your pay. If you earned $30,000 last year and put $900 (3% of annual salary) into your 401(k), your employer would make a matching contribution of $450. Your total annual contribution then rises to $1,350 and you've already got a 50% return on your investment!

Try Raising Your Contributions By 1%

Once you've taken advantage of your matching contribution, try raising your contributions by 1%.

Let's take the example above, but exclude the company match and assume your salary remains constant. (It's likely that you'll see some salary appreciation over your working career, but it's impossible to know how much. Therefore, we'll err on the conservative side for this example.)

If you're setting aside $900 a year (3% of salary), that's $75 a month. Let's assume you're 35 years old and plan to retire at age 65. Further assume a 10% return and tax rate of 31%. Under these conditions, in 30 years, your account would grow to $202,743.

Suppose you boosted your contribution by one percentage point to 4%, or from $75 to $100 a month. At the end of 30 years, your retirement account would have a balance of $270,325, a 33% increase in the final total.

Click here to go to the 401Kafe's 401(k)alculator to see how your portfolio would behave http://www.401kafe.com/tools/calc.html

Rebalance Your Accounts

The start of the year is an ideal time to check to make sure your accounts are correctly balanced.

"Less than 3% (of folks) rebalance their portfolio on a regular basis. Most people make the decision … and just the let money sit there." - Jim Sullivan a principal with Arthur Andersen LLP.

Most of us haven't rebalanced our 401(k) accounts since we set them up. "Less than 3% (of folks) rebalance their portfolio on a regular basis," said Jim Sullivan, a principal with Arthur Andersen. "Most people make the decision … and just the let money sit there."

When you rebalance your account, you want to do two things. First, make sure that the funds you're currently invested in are performing up to your expectations. If they're not, and you have alternate investment options, you might want to consider switching.

One of the best ways to figure out if your fund is doing as expected is to read the fund's annual report. It shows the returns and sometimes gives investment information. Many funds publish their annual reports in the first quarter of the year. If you don't get one in the mail, you should be able to find most of these reports on the Securities and Exchange Commission's EDGAR site.

When you review your investments, look beyond the three-month and one-year returns, Adamson urges. "Look at the performance of each fund, the relative risk, the relative (investment) style, and look at three-, five and 10-year returns," she said.

Second, make sure that you are correctly allocated. Say you set up your 401(k) allocation five years ago with 60% in equities and 40% in fixed income. Given the stock market's recent strength, your equity holdings would likely have outperformed the fixed income portion, and therefore make up a larger percentage of your account now.

Hurley doesn't do a review every year. Instead he sits down every few years with a calculator and runs the numbers. Currently he's fully invested in equities, but he expects as time passes, he'll likely shift his allocations. It's not the turn of the year that causes him to review, but rather life-changing events such as marriage, a job change or the birth of a child.

Consider non-tax-deferred accounts

Financial planners typically describe retirement planning as a three-legged stool. One leg represents Social Security, another represents your employer's savings plan and the third is your own savings.

You'll want to have all three "legs" in your saving strategy. Savings of your own can include an annuity, Roth IRA or even a non-tax-deferred savings account. Some advisors, including Benna, say it's a good idea to have some retirement savings that won't be taxable at retirement

Before you open a Roth IRA, you should check to see if you qualify. Click here to see the IRS qualification rules:

Create A Budget And Follow It

A budget can help you set your spending priorities straight. You can figure out how to pay off debt, save for retirement and have enough extra cash for a few luxuries.

A good way to create a budget is to keep track of all your income and expenses for a month. Once you get a look at where the money's going, you can set spending priorities. You may decide that money spent on a daily double latte would be better directed toward retirement savings.

You can also use a budget to help plan major expenditures, while still keeping to your current plans.

Adelia Linecker, a 28-year old copy editor, and her husband, Anton, are using a rough budget to help reach their goal to buy a house this year. She expects they will be able to afford a down payment in a few more months.

Further, she expects that once the first-time home purchase expenses are past, she'll be able to continue saving for retirement at the same rate.

Check Your 401(k) Beneficiary Arrangement

If, in the last year, you changed jobs, got married or divorced, had a child, or became a widow or widower, you should review your beneficiary designation, says Sean Fahey, an attorney with Chicago-based Levin & Schreder, Ltd.

Be aware that as far as your 401(k) is concerned, federal law automatically assumes your spouse is your primary beneficiary. If you want to designate someone else, your children for instance, you need to get your spouse to sign a waiver.

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.

Resolution Revolution: It's Never Too Late to Boost Your 401(k) Performance

By Clifton Linton
Writer, mPower

In this article: Do some retirement planning Get your full employer match Raise your contribution by 1% Rebalance your accounts Consider non-tax-deferred accounts Follow a budget Check your beneficiary arrangement

You might call 32-year old Morgan Hurley a great prognosticator, or at least very insightful.

In 1992, before it was widely known that the Social Security trust fund might eventually run out of money, Hurley resolved to completely provide for old age with his own savings. "I wouldn't count on any (outside) sources of retirement income," he said.

Now, even with two children to put through college one day, he's diligent about putting money in his 401(k). While he admits he didn't consciously make any financial resolutions for 2000, having a plan in place helps carry out the resolution he made at age 25 to be financially independent in old age.

While Hurley got an early start on retirement planning, it's not too late to do some of your own. Here are some resolutions that financial planners urge you to make, and keep.

Do some retirement planning

The one resolution just about all the experts we talked to agree on was: sit down and do a little retirement planning.

Hurley started planning soon after college graduation. "My goal, at a minimum, is to be able to retire at 59½," he said.

He's self-taught when it comes to retirement planning. "The closest thing I had to advice was in my first job, we had a guy affiliated with the (company) 401(k) plan who told me `being young, put everything in the market and be aggressive,'" Hurley said.

According to the Employee Benefit Research Institute's (EBRI) 1999 Retirement Confidence Survey, Americans do a woeful job of planning for their golden years. Fewer than one in 10 workers appear to be doing a very good job of preparing for retirement, EBRI says.

"People who know how much they need for retirement tend to have five times more money in their 401(k) plan than people who don't know." - Dennis Ackley Vice President, Participant Services J.P. Morgan / American Century Retirement Plan Services

Just by participating in a 401(k) plan you've already made the decision to plan for your retirement. But, that may not be enough. Now's the time to sit down and hone your strategy.

"The goal is building an adequate retirement nest egg," said Ted Benna, the creator of the first 401(k) plan.

Figure out what your retirement goals are and what it will take to reach them. Then, figure out if your goals are realistic. For instance, will a $100,000 retirement portfolio be enough to sustain you, or will you need more?

"People who know how much they need for retirement tend to have five times more money in their 401(k) plan than people who don't know," said Dennis Ackley, Vice President of Participant Services with J.P. Morgan /American Century Retirement Plan Services, citing the EBRI study.

Using calculators offered by the American Savings Education Council, you could quickly estimate your retirement savings needs in 10 minutes, Ackley estimated. Other on-line resources are available if you want to go into more detail.

You can find ASEC's on-line tools at: http://www.asec.org/toolshm.htm

If you don't participate in your company's 401(k) plan, this is a good time to join. A 401(k) plan is one of the most-powerful retirement savings tools around. You can contribute up to $10,500 in a 401(k) plan this year, before taxes, and with the automatic payroll deduction, saving becomes relatively painless and hassle-free. Comparatively, you can only save $2,000 a year in an IRA.

Get your full employer match

Next on the list: get the full 401(k) matching contribution from your employer.

"It's free money," said Barbara Adamson, certified financial planner with Boone Financial Advisors Inc.

Here's how it works: Suppose your company offers a typical matching contribution of 50 cents on the dollar, up to the first 3% of your pay. If you earned $30,000 last year and put $900 (3% of annual salary) into your 401(k), your employer would make a matching contribution of $450. Your total annual contribution then rises to $1,350 and you've already got a 50% return on your investment!

Try Raising Your Contributions By 1%

Once you've taken advantage of your matching contribution, try raising your contributions by 1%.

Let's take the example above, but exclude the company match and assume your salary remains constant. (It's likely that you'll see some salary appreciation over your working career, but it's impossible to know how much. Therefore, we'll err on the conservative side for this example.)

If you're setting aside $900 a year (3% of salary), that's $75 a month. Let's assume you're 35 years old and plan to retire at age 65. Further assume a 10% return and tax rate of 31%. Under these conditions, in 30 years, your account would grow to $202,743.

Suppose you boosted your contribution by one percentage point to 4%, or from $75 to $100 a month. At the end of 30 years, your retirement account would have a balance of $270,325, a 33% increase in the final total.

Click here to go to the 401Kafe's 401(k)alculator to see how your portfolio would behave http://www.401kafe.com/tools/calc.html

Rebalance Your Accounts

The start of the year is an ideal time to check to make sure your accounts are correctly balanced.

"Less than 3% (of folks) rebalance their portfolio on a regular basis. Most people make the decision … and just the let money sit there." - Jim Sullivan a principal with Arthur Andersen LLP.

Most of us haven't rebalanced our 401(k) accounts since we set them up. "Less than 3% (of folks) rebalance their portfolio on a regular basis," said Jim Sullivan, a principal with Arthur Andersen. "Most people make the decision … and just the let money sit there."

When you rebalance your account, you want to do two things. First, make sure that the funds you're currently invested in are performing up to your expectations. If they're not, and you have alternate investment options, you might want to consider switching.

One of the best ways to figure out if your fund is doing as expected is to read the fund's annual report. It shows the returns and sometimes gives investment information. Many funds publish their annual reports in the first quarter of the year. If you don't get one in the mail, you should be able to find most of these reports on the Securities and Exchange Commission's EDGAR site.

When you review your investments, look beyond the three-month and one-year returns, Adamson urges. "Look at the performance of each fund, the relative risk, the relative (investment) style, and look at three-, five and 10-year returns," she said.

Second, make sure that you are correctly allocated. Say you set up your 401(k) allocation five years ago with 60% in equities and 40% in fixed income. Given the stock market's recent strength, your equity holdings would likely have outperformed the fixed income portion, and therefore make up a larger percentage of your account now.

Hurley doesn't do a review every year. Instead he sits down every few years with a calculator and runs the numbers. Currently he's fully invested in equities, but he expects as time passes, he'll likely shift his allocations. It's not the turn of the year that causes him to review, but rather life-changing events such as marriage, a job change or the birth of a child.

Consider non-tax-deferred accounts

Financial planners typically describe retirement planning as a three-legged stool. One leg represents Social Security, another represents your employer's savings plan and the third is your own savings.

You'll want to have all three "legs" in your saving strategy. Savings of your own can include an annuity, Roth IRA or even a non-tax-deferred savings account. Some advisors, including Benna, say it's a good idea to have some retirement savings that won't be taxable at retirement

Before you open a Roth IRA, you should check to see if you qualify. Click here to see the IRS qualification rules:

Create A Budget And Follow It

A budget can help you set your spending priorities straight. You can figure out how to pay off debt, save for retirement and have enough extra cash for a few luxuries.

A good way to create a budget is to keep track of all your income and expenses for a month. Once you get a look at where the money's going, you can set spending priorities. You may decide that money spent on a daily double latte would be better directed toward retirement savings.

You can also use a budget to help plan major expenditures, while still keeping to your current plans.

Adelia Linecker, a 28-year old copy editor, and her husband, Anton, are using a rough budget to help reach their goal to buy a house this year. She expects they will be able to afford a down payment in a few more months.

Further, she expects that once the first-time home purchase expenses are past, she'll be able to continue saving for retirement at the same rate.

Check Your 401(k) Beneficiary Arrangement

If, in the last year, you changed jobs, got married or divorced, had a child, or became a widow or widower, you should review your beneficiary designation, says Sean Fahey, an attorney with Chicago-based Levin & Schreder, Ltd.

Be aware that as far as your 401(k) is concerned, federal law automatically assumes your spouse is your primary beneficiary. If you want to designate someone else, your children for instance, you need to get your spouse to sign a waiver.

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.