How to Take Charge of Your 401(k)

Roll of money in a nest
By Joanne Cleaver

Inertia used to be the silent enemy of retirement planning. People just didn't get around to signing up for employer-sponsored 401(k) plans.

But thanks to the Pension Protect Act of 2006, regulators began allowing employers to automatically enroll employees in retirement plans, and suddenly, inertia became retirement planning's secret best friend. New employees were automatically signed up for 401(k) plans, and, at first, were required to contribute 2 percent to 3 percent of their base compensation. Nearly everybody complied without a peep, so some employers ratcheted up the minimum contribution to between 4 percent and 6 percent, enabling more employees to capture the maximum employer match.

Large employers are more than twice as likely to auto-enroll their employees: According to a new study by Bank of America (BAC) Merrill Lynch, 33 percent of employers with less than $5 million in employee 401(k) plans enrolled employees automatically, compared to 71 percent of employers with more than $100 million in employees' 401(k) plans.

As your 401(k) grows, it accounts for a greater share of your total portfolio if you have outside investments. That means you might want to consider actively steering it instead of continuing to let the account be directed by the choices you initially made when it was set up.

These steps can help you change gears from passive to active management of your 401(k):

1. Figure out how much monthly income you will need in retirement. Calculate how much you need to save now to achieve that goal. Then, adjust your 401(k) contributions accordingly, depending on your other financial commitments and any employer matching contributions. The Employee Benefit Research Institute offers a suite of retirement income and savings calculators at its public service website, Choose to Save.

Joleen Workman, an assistant vice president with retirement and investor services at Principal Financial, says a good rule of thumb is to save about 10 percent of your earnings over the course of your working career. %VIRTUAL-article-sponsoredlinks%That should yield a retirement income of about 85 percent of the salary you earned just before retiring.

But if you're starting late or have had savings interruptions, you might need to bump up your 401(k) contributions to catch up. A relatively painless way to do that is to increase your automatic contribution by one percentage point annually until you reach 10 percent. Those over age 50 can save more in their 401(k) plans, Moore says, according to Internal Revenue Service rules. This calculator from Principal helps you understand your momentum toward your desired retirement income.

2. Review all of your benefits and ask yourself how adjusting one affects another. Your employer may provide financial planning services and educational workshops. Many of these services will give you an integrated view of all your benefits, from health to investment, Crain says. That means that you can get coaching on how to adjust, say, your health care pretax flexible spending account to channel more cash toward retirement savings.

3. Consider hiring an independent financial planner. According to the Principal Financial Well-Being Index, a quarterly survey, only 30 percent of employees work with financial professionals, but of those who do, 59 percent created their own financial goals.

For example, if you review your 401(k) with an independent certified financial planner, you might explore if a target-date fund is a good move, says Frank Moore, founding partner of Vintage Financial Services in Ann Arbor, Mich.

Target-date funds adjust the mix of investments as retirement approaches, moving from a focus on growth to stability. Usually, Moore says, you can adjust the mix of funds in an employer-sponsored plan at no cost, but confirm the terms before you initiate a trade.

4. Track the returns in your 401(k). Using sites like (MORN), make sure the funds offered by your employer are at least keeping pace with similar funds. It's a good idea to conduct this benchmarking exercise annually, Moore says. If your funds are lagging, talk with your financial adviser about how and when to move some of your investments to different funds that are more likely to keep you on track with your goals.

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How to Take Charge of Your 401(k)

For the best chance of maintaining your lifestyle in retirement, aim to contribute 15% of your salary, including any employer match, to your 401(k) or other savings account throughout your career (see What's Your Retirement Number?). Most people fall short of that benchmark. The average employee contribution to a 401(k) is 6% to 8%.

Saving 15% may seem like lifting weights at the gym for several hours. Try it anyway, says Stuart Ritter, a financial planner and vice-president of T. Rowe Price Investment Services. "Kick your contribution level up to 15% for three months. At the end of the three months, you can lower it, if necessary." But rather than dipping back to single digits, go with 10% or 12%, he says. "People find they can settle on a much higher amount than they were contributing before."

Procrastination is another risk: With each year you neglect to save, you lose an opportunity to fuel your accounts and to let compounding keep the momentum going.

So powerful is the effect of saving early that you could have less trouble catching up if you take a several-year break-say, to pay for college-than if you wait until midlife to start. At that point, says George Middleton, a financial adviser in Vancouver, Wash., "the amount of money you have to put away can be ungodly."

Still, you can make headway, especially if your kids are grown and you have fewer expenses. Say you're 55, earn $80,000 a year and have nothing saved for retirement. You put the pedal to the metal by setting aside $23,000 in your 401(k) each year for the next ten years. That $23,000 combines the annual maximum for people younger than 50 ($17,500 in 2013) plus the annual catch-up amount for people 50 and older ($5,500). If your employer matches 3% on the first 6% of pay and your investments earn an annualized 7%, you'd amass $434,700 by the time you reached 65.

For some investors, a bad case of the jitters became a bigger derailer than the recession itself (see How to Learn to Love [Stocks] Again). "People got very nervous and became more conservative, so when the market came back up, they had less of their port­folio participating in the rally," says Suzanna de Baca, vice-president of wealth strategies at Ameriprise Financial.

You can get back in (and stay in) by investing in stocks or stock mutual funds in set amounts on a regular basis. Using this strategy, known as dollar-cost averaging, you automatically buy more shares at lower prices and fewer shares at higher prices-an antidote to market-driven decisions. Once you decide on your mix of investments, use automatic rebalancing to keep it that way, advises Debbie Grose, of Lighthouse Financial Planning, in Folsom, Cal.

Most financial planners recommend that your portfolio be at least 80% in stocks in your twenties, gradually shifting to, say, 50% stocks and 50% fixed-income investments as you approach retirement. But formulas don't cure panic attacks. "Set your risk at the level you're willing to withstand in a downturn," says Middleton.

Amassing hundreds of thousands of dollars for retirement is challenge enough, but parents are also expected to save $80,000 to $100,000 per kid to cover the college bills. In fact, half of parents don't save for college at all, and the average savings among those who do runs about $12,000, according to a 2013 report by Sallie Mae, the financial services institution. Faced with a shortfall, two-thirds of families say they would use their retirement savings to pay for their children's college education, if necessary.

Don't wait until your kid is 17 to discuss how much you'll contribute. Have a conversation early about how much you can afford to give, says Fred Amrein, a registered financial adviser in Wynnewood, Pa.

A Roth IRA can be one way to save for both college and retirement, although it won't get you all the way to either goal. You can contribute up to $5,500 a year ($6,500 if you're 50 or older) in after-tax dollars, and the money grows tax-free. You can withdraw your contributions for any reason, including college, without owing tax on the distribution. You will pay taxes on the earnings (unless you're 59 1/2 or older and have had the account for at least five calendar years), but you won't have to pay a 10% early-withdrawal penalty if you use the money for qualified higher-education expenses.

Leaving the workforce, even temporarily, deprives you of current income and makes it tougher than ever to save for retirement. You might even find yourself tapping your retirement accounts to cover day-to-day expenses. You'll owe taxes on distributions from a traditional IRA plus a 10% penalty if you're younger than 59 1/2.

The best way to avoid that dismal situation is to have an emergency reserve that covers at least six months or even a year of living expenses, says Jim Holtzman, a certified financial planner in Pittsburgh. He acknowledges, however, that "that's easy to recommend and hard to implement." Avoid further disaster by hanging on to health insurance: If you can't get coverage through your spouse, look into keeping your employer-based coverage through COBRA. You can extend that coverage for up to 18 months, although you'll pay the full premium plus a small administrative fee. As of January 2014, you'll also have access to coverage through state health exchanges.

Married couples who depend on each other's earning power need life insurance to cover the gaps when one spouse dies. You can get a rough idea of how much coverage you'll need on each life by calculating what you each contribute to annual living expenses and multiplying that amount by the number of years you expect to need it, says Steve Vernon, of Rest-of-Life Communications, a retirement consulting firm. (For advice on how to do a more precise calculation, see How Much Life Insurance Do You Need?)

If you have a pension, you'll have the option of choosing a single-life benefit, which ends at your death, or the standard joint and survivor's benefit, which pays less while you're alive but keeps paying (typically at 50% to 75% of the benefit) for the rest of your spouse's life. Your spouse is legally entitled to the survivor's benefit and must sign a waiver to forgo it. Don't be tempted by the higher-paying single-life option if your spouse will need the survivor's benefit later.

Decisions you make in claiming Social Security are similarly key. If you're the higher earner (typically, the man), "you will really help your spouse by delaying Social Security as long as possible," says Vernon. The benefit grows by about 6.5% to 8% a year for each year you delay after age 62, when you first qualify, until you reach age 70. If you die first, your spouse can qualify for a survivor's benefit up to the full amount you were entitled to, depending on the age at which she files.

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