6 Secrets to Saving More for Retirement

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By Jane Bennett Clark

As the spouse of a Foreign Service officer, Cathy Lincoln moved frequently and changed jobs with each new post while raising two children. She had neither the time nor the inclination to pay attention to her retirement accounts. "I had a set-it-and-forget-it attitude," says Lincoln, 56, of Washington, D.C. After a divorce, however, she wanted to see if her investments were on course. Rather than run the numbers herself, she consulted an adviser at the Royal Bank of Canada, which administers her IRA. On the adviser's recommendation, she tweaked her investments and rolled a 401(k) held by a former employer into the IRA. The fine-tuning put her accounts in good running order, she says. "A financial adviser pulls it all together."

SEE ALSO: SLIDE SHOW: 9 Smart Retirement Strategies for Women

Planning for retirement is like taking a long road trip. At first, you put your plan on cruise control, letting your employer make some or all of the calls about how much to save and in which investments. Later, as your finances and priorities become more complicated, you take the wheel yourself, tweaking those investments and dialing up (or paring back) your contributions. By the time you're approaching retirement, you may want to turn over the driving to an expert (at least temporarily) who will look under the hood and calibrate your investments to your exact needs.

No matter what stage you're in, your employer-sponsored 401(k) plan is key to getting you where you need to be. These pretax accounts, also called defined-contribution plans, now far surpass pensions as the retirement savings vehicle of choice among private companies. In 2014, more than 90 million Americans were covered by a defined-contribution plan, with assets totaling more than $6.5 trillion, according to Vanguard. The average account balance with Vanguard was $102,682. Employers played a key role in fattening those balances, bringing the average contribution rate to 10.4% of annual pay, including a 6.9% average contribution rate by employees.

These six steps will help you get the most out of your 401(k) and take advantage of the momentum your employer offers.

1. Get a head start

Given the daunting prospect of financing your own retirement, you'd think that throwing money into your 401(k) from the start of your career would be a top priority. In fact, many young (and not-so-young) workers go with Plan B: procrastinating. In recent years, companies have countered that tendency to stall by automatically enrolling employees in the company plan. Workers are given the opportunity to opt out, but relatively few do. In 2014, employees whose plans included automatic 401(k) enrollment had an 89% participation rate, compared with 61% for employees in plans with only voluntary enrollment, according to a 2015 study of Vanguard plans.

The gentle push to begin steadily saving makes for a powerful head start. A recent Wells Fargo study showed that people ages 55 to 59 had accumulated three times the retirement stash of those 60 or older. How so? The younger group had started saving consistently at 31, six years earlier than the older group. "It's only a six-year difference, but when you think about the power of six years of savings compounded over 25 years, that's significant," says Joseph Ready, director of institutional retirement and trust for Wells Fargo. "The message is, don't lose the power of time. Start saving as early as possible."

2. Step up the pace

The downside of relying on your employer to make your savings decisions is getting lulled into thinking you're saving enough. About half of participants who are automatically enrolled in a Vanguard 401(k) start at a 3% deferral rate, and many are content to stay there. "They think that this must be the right savings rate, and they leave it alone," says Ready.

Lately, more employers have taken advantage of that very tendency by initially setting contributions at 4% or more and automatically hiking the contribution rate by one percentage point a year, most often up to 10%. Employers also increasingly offer a dollar-for-dollar match rather than the once-common 50 cents on the dollar. A recent survey of large employers by Aon Hewitt, a benefits consulting firm, showed that 19% of companies match contributions dollar for dollar up to the first 6% of salary, and 23% offer the match up to the first 3% to 5%. "Plan sponsors are trying to make the plan as appealing as possible. They're telling you to invest your retirement funds with them because they can help you the most," says Rob Austin, director of retirement research at Aon Hewitt.

If your employer doesn't pave the way for you with automatic nudging, you'll have to get there on your own. Aim to contribute at least 10%, including the company match, within the first few years of your savings career; you should contribute more if you get a late start. Many retirement experts recommend saving as much as 12% to 15%, including the employer contribution, from the get-go. (Some 24% of Kiplinger readers who responded to a recent poll save 11% to 15% of their income for retirement, and 34% save more than 15%.) In 2016, you can kick in $18,000 and, if you're 50 or older, another $6,000 in catch-up contributions, for a total of $24,000.

The get-go is also a good time to start contributing to a Roth 401(k), if your employer offers one. This option, offered by six out of 10 large employers, lets you contribute after-tax dollars to your account. Withdrawals are tax- and penalty-free if you have had the account for five calendar years and are 59 1/2 or older. Given that your salary and tax rate will likely go up as your career progresses, your early career is a good time to start funding a Roth. You can contribute the annual max to the Roth 401(k) or split your contributions between the pretax and after-tax accounts.

3. Get the right mix

Imagine someone handing you the keys to a powerful vehicle that you have little or no experience driving. You'd want to read the manual and maybe take a few lessons, right? Nah. The majority of people enrolled in a 401(k), currently the most powerful engine of retirement saving, have little interest in learning about plan details, much less poring over investments and coming up with a mix suited to their age and risk tolerance, says Kenny Phan, a 401(k) consultant in Phoenix. "I've been to many 401(k) meetings on investment options, and employees don't show up."

Partly in response to such do-it-for-me investors, employers have added target-date funds to their 401(k) lineup and are using them as the default investment for participants who are enrolled automatically. Target-date funds put you mostly in stocks when you're in your twenties and grow more conservative -- say, a mix of 60% stocks and 40% bonds -- as the target date approaches. For instance, the Vanguard Retirement 2060 fund currently invests 90% of participants' holdings in stocks, reflecting the risk capacity of people whose retirement date is 44 years hence; by 2060, the mix will have adjusted to roughly 50% stocks and 50% bonds. In 2014, almost two-thirds of participants in Vanguard-administered plans had invested some or all of their accounts in target-date funds, up from 5% in 2005.

Target-date funds are designed to be a one-stop solution, so you defeat the purpose if you also invest money elsewhere. That said, combining a target-date fund with other types of investments or other target-date funds can work if you're mindful of your overall asset allocation. With these funds, you can be confident that your portfolio will not only be appropriately allocated but also well diversified.

If you're assembling a portfolio on your own, be sure to include domestic large-company and small-company stocks, international stocks (including those in emerging markets), and domestic and international bonds. Also, make sure your investments reflect the appropriate risk for your age. A recent study by Fidelity showed that 11% of people ages 50 to 54 and 10% of people 55 to 59 had invested 100% of their 401(k) in stocks, leaving them dangerously exposed to a market downturn as they close in on retirement. "With 401(k)s, you only have to get two things right -- save enough and invest appropriately," says Jean Young, a senior research analyst with Vanguard Center for Retirement Research.

4. Review fees

A few years ago, news reports warned that excessive 401(k) fees were reducing individuals' retirement accounts by tens of thousands of dollars. But here's the good news: 401(k) fees, including investment management fees and administrative costs, have declined over the past few years. A recent report by BrightScope and the Investment Company Institute showed that the average cost of a 401(k) plan had dropped from 1.02% of assets in 2009 to 0.89% in 2013.

One reason for the change is that since 2012, employers have been required to spell out 401(k) fees to plan participants, and plan administrators must disclose their fees to employers. "Because of those rules, employers and employees are more aware of the costs associated with the plans," says Phan. "And because employers have the fiduciary responsibility to evaluate their plan, they are making sure the fees are competitive with other plans."

Fee disclosure rules have also changed the way plan sponsors -- that is, employers -- calculate admin­istrative fees, making them fairer and easier to understand, says Austin. In 2011, 83% of companies charged administrative fees as a percentage of assets. Now, 39% impose a flat-dollar amount per account. The median flat fee per person was $64 in 2015, according to NEPC, an investment consulting firm. Not only does the change mean that savers are paying equally for the same services, says Austin, but it "also gives participants a clear line of sight on fees."

For all these improvements, you can't know how your 401(k) fees measure up unless you compare costs with benchmarks shown on the statement as well as with plans at similar-size companies (to compare plans, go to www.brightscope.com). For instance, you might find that the fund you're invested in charges a higher management fee than a comparable one with the same performance, in which case you've got a clear signal to switch. Similarly, if the fee for administrative costs seems out of whack compared with other plans, bring the matter up with your employer.

If all else fails, you could invest in a traditional or Roth IRA outside your 401(k), after contributing enough to the 401(k) to meet the match. In 2016, you can contribute up to $5,500 (plus $1,000 if you are 50 or over) to a traditional IRA or a Roth.

5. Put the pedal to the metal

If you're in your late forties or early fifties, you may have fallen off the savings track -- say, to cover college bills or buy a bigger house. Contributing less to your 401(k) for a few years won't devastate your retirement prospects, especially if you started saving early. But remember that retirement is your first priority, says David Meyers, a certified financial planner in Palo Alto, Calif. "You can't fix that. It's harder to retire on less than to live in a smaller house."

Carving an extra $50 or $100 out of your budget to beef up your 401(k) is helpful, but ideally your earning power is now at a point that you can contribute the max, including the catch-up contribution. And if you have a high-deductible health plan that qualifies you for a health savings account, you can also save $3,350 a year if you're single ($6,750 for families) in 2016, with a $1,000 catch-up amount if you're 55 or over. Maxing out those two savings vehicles alone gets you almost $30,000 in pretax savings a year. "If you can do that for five or 10 years, you can really catch up," says Ready. "It's never too late."

By this age, you probably have a decent idea of whether your income -- and thus your tax rate -- will go up or down in retirement. If your employer offers a Roth 401(k), consider contributing to it now, if you haven't funded it already. You'll probably want to go this route if you believe your tax bracket will go up in retirement rather than down. But even if your income will likely drop, you would be wise to squirrel away some money in a Roth in case tax policy changes, says Austin. "You'll have a buffer from taxes later," he says.

6. Enlist the experts

Has life gotten complicated? You'll need more help. "A 25-year-old in a retirement plan can simply pick a 2065 target-date fund," says Austin. "But when you get to 55, one person may have paid off his mortgage, another not. One might have a huge pension, another doesn't. And how do you fold in spouses? For those people, it's nice to have more input."

Enter managed accounts, offered by more than half of employers as an option in their 401(k)s, according to the Aon Hewitt study. With these accounts, a professional advisory service will discuss your financial circumstances, perhaps both online and over the phone, and tailor a portfolio accordingly, periodically monitoring and rebalancing it. Managed accounts offer a high degree of personal advice, so they're most appropriate for investors who have complex finances -- say, multiple 401(k)s, a pension or company stock outside their retirement account, says Sangeeta Moorjani, senior vice president of Fidelity's Professional Service Group. "They realize they can't do it on their own." For that help, you'll pay a fee of about half a percentage point of your assets; some employers pick up the tab.

If you don't have access to a managed account or want more face-to-face advice, schedule a few sessions with a financial adviser. Advisers streamline your accounts, coordinate your income and assets with those of your spouse, and assess your retirement readiness. Meyers, for instance, offers a portfolio review plus Social Security planning and a retirement income analysis. "Before I dive into a portfolio, I add up all retirement assets and all nonretirement assets to get an idea of the total picture and project what it will take to achieve the level of spending the client wants in retirement." The best part of his job? "Every now and then, I'll look at the numbers and say, 'You can retire yesterday.' That's really cool."
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