By Rob DeHollander
The New Year is a great time to review your retirement-savings strategy. Retirement-plan-contribution limits are increasing this year 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 plus $6,000) in his 401(k) plan.
Here are five savings ideas to consider:
Know your numbers
To save successfully for retirement, you need to know how much money you’ll need and the rate of return you’ll need to earn by then. Once you know your numbers, save intentionally and routinely and measure your progress with your financial adviser.
Autopilot your savings
Many plans automatically enroll you and increase savings over time. Some don’t, however, so make sure you’re enrolled and then use the auto-escalation if offered. Most workers should aim to save at least 15 percent of pay each year, which can include your employer’s matching contribution. If you can’t save that much right now, try to contribute enough to get your full employer match and gradually boost your savings rate each year.
Consider the Roth 401(k)
An estimated 71 percent of 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).
Review your target fund date
More than 90 percent of retirement plans now offer target-date funds, which 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. As your balance grows, however, you may want a more-personalized strategy specific to your timeframe and risk tolerance.
Understand your costs
Finally, make sure you pay attention to underlying investments cost. Fees are coming down — more than 40 percent of 401(k) plan sponsors reduced fees in 2017, compared with 31.6 percent in 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. The typical 401(k) fund charges 0.5 percent, and index options may cost just 0.05 percent.
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 percent in fees each year, increasing your savings rate from 3 percent to 4 percent will increase your nest egg by more than 25 percent over time — a much bigger impact on your retirement readiness.
Robert DeHollander is a managing partner and co-founder of the DeHollander & Janse Financial Group.