By Rob DeHollander
The new year is a great time to review your retirement savings strategy. Increases in retirement plan savings plan contribution limits are coming in 2019. The contribution limits have increased to $19,000, for 401(k), 403(b) and 457 plans. The catch-up contribution limit for employees 50 and older remains unchanged at $6,000, which means an employee 50 or older can put as much as $25,000 ($19,000+$6,000) in their 401(k) plan. Your employer may also offer optional matching contributions.
As we approach the new year, here are five savings ideas to consider:
Know your numbers
I’m still amazed that most workers can’t answer two simple questions: ‘How much money will I need at retirement?’ and ‘what rate of return do I need to earn between now and then?’ These are measurable numbers and they’re different for each of us. To be sure, markets change, inflation varies, jobs and life circumstances change. But answering these two simple questions are essential to successfully saving for retirement. Once you know your numbers, save intentionally and regularly. You’ll likely work for 40 years so take some time regularly to measure your progress with your financial advisor and periodically course-correct.
Autopilot your savings
A common maxim for retirement saving is to “pay yourself first.” Many plans automatically enroll you and increase savings over time. However, some don’t, so make sure you’re enrolled and then use the auto-escalation if offered. Save aggressively – I believe most workers should aim to save at least 15 percent of pay each year, which can include your employer matching contribution. If you can’t save that much right now, try to contribute enough to get your employer full match and gradually boost your savings rate each year.
Consider the Roth 401(k)
I’m a big fan of the Roth 401(k). Many plans now offer a Roth 401(k) feature, along with the regular pretax account. With a Roth, you don’t get an upfront tax break, but your money grows tax-free. Unlike a Roth IRA, there is no income restriction to a Roth 401(k). And you can contribute to both pretax and Roth accounts. I believe a Roth 401(k) is an especially good deal for younger people, who are most likely to be in a lower tax bracket now than in the future.
Review your target fund date
Retirement plans now offer target date funds. These all-in-one portfolios provide instant diversification and an asset mix that gradually becomes more conservative as you near retirement. Target-date funds are great as an initial set-it-and-forget-it option. However, as your balance grows, you may want a more personalized strategy specific to your timeframe and risk tolerance. It’s a good idea to regularly review your retirement plan options with your financial adviser to make sure you understand the underlying investments and risk profile for your portfolio.
Understand your costs
Finally, make sure you pay attention to the costs of your underlying investments. Fees are coming down – more plan sponsors reduced fees in 2017, compared to 2016. Of course, the less you pay in fees, the better your net investment returns. So review the expenses of your plan, they will be detailed on your 401(k) statement or the plan’s website. One final caveat, while expenses are important, much more so is saving enough over time. Think about this – while shifting to an index fund may save 0.45% in fees each year, increasing your savings rate from 3% to 4% may increase your next egg over time – a much bigger impact on your retirement readiness.
Robert DeHollander, CFP® is a Managing Partner and Co-Founder of the DeHollander & Janse Financial Group located at 3515 Pelham Road, Suite 100, Greenville, SC, 29615. Ph: 864-770-0220
Securities and advisory services offered through Commonwealth Financial Network®, member FINRA/SIPC, a Registered Investment Adviser.