The numbers don’t lie. When researchers look at 401(k) activity, they know from the stats which people are saving more than average.
If you adopt just three practices in investing for retirement, you’ll be able to boost your portfolio. They aren’t terribly complicated, yet mean a lot over time.
Christina Kilroy, vice president of ICI Education Foundation, states “If you’re one of the millions of savers using a 401(k) to help build a nest egg for retirement, it’s important to make sure you’re getting the most from your plan. Small changes today can make a big difference tomorrow.”
According to The Investment Company Institute, the trade association for the mutual fund industry, saving in your 401(k) can be more productive if you’re consistent in your investing. Your money compounds if you pay attention to these three practices:
Keep Your Money in the Plan. The temptation to pull cash out of your 401(k) when you change jobs is intense. But it’s a losing proposition. You get nailed with a 10 percent tax penalty (before age 59 1/2) and pay federal income taxes on the proceeds. The government wins and you lose because you have less money to compound over time.
“Investors should consider their options when leaving a job, including rolling the money over to an individual retirement account (IRA), moving it to their new employer’s plan, or possibly keeping it in their old employer’s plan,” the ICI advises.
Take the Match! Your employer’s matching contribution is free money, but you have to contribute a certain amount — usually at least six percent of your salary — to get this bonus. It’s a great deal.
“Three out of four 401(k) plans include employer contributions to workers’ accounts,” the ICI research shows. “The amount that an employer will contribute often is based on how much an employee contributes. 401(k) participants should review their plans with this in mind to make sure they aren’t leaving money on the table.”
Have a Plan and Stick to It. How much of a mix of stocks and bonds should you have? What feels right to you? How much will it hurt if you take a hit in the stock market? You need an investment policy that you vet once and year — and stick to the rest of the time.
“Some investors want to build their own portfolios and adjust their holdings of asset classes over time. Others prefer to invest in target date funds, which hold a diversified mix of stocks and bonds and automatically rebalance to become less focused on growth and more focused on income as savers approach and move into retirement.This option has been increasing in popularity in recent years, and more than 70 percent of 401(k) plans offer target date funds.”
Whether you choose a target-date fund for an auto-pilot approach or pick individual funds, here’s another rule that works: Consistently raise your contributions over time. That way you will save more in all kinds of markets. It may sound dull. but it’s a pretty solid way to build wealth.