401(k) Open Enrollment: Does Your Retirement Plan Need a Checkup?
Many company benefit programs have their open enrollment period coming up soon, which means you have a chance to make changes to all of your employee benefits, including -- and especially -- your retirement plan.
Maybe now is a good time to make sure everything is on track to provide you with the best possible retirement. While you have the opportunity, here are three things to look at before your open enrollment period ends.
Are you giving up free money?
Make sure you know how much of your contributions your company is willing to match. If you've been at your job for a while, the match may have changed over the years, especially given the progress made in the U.S. economic recovery, so it's worth looking into.
You should be using this number as the bare minimum amount you contribute to your 401(k) plan. If you contribute any less, then you're literally turning down free money.
For example, let's say you earn $70,000 per year and your employer will match 50% of your contributions up to 6% of your salary. So if you contribute that amount of your salary, or $4,200 per year, your employer will contribute an additional $2,100. If you choose to set aside only 3% of your salary, you're leaving more than $1,000 in your employer's pocket.
You might be amazed at how this can add up over time. In the first example, where the employee takes full advantage of the matching and receives $2,100 per year from the employer, that can mean an extra $215,000 in their retirement account if their money earns average returns of 7% per year. And that's only counting the employer's contribution -- not any money the employee contributed.
Maybe you should contribute a little more
Taking full advantage of your employer's match is a great start, but it still might not be enough to maintain your lifestyle in retirement. More than half of plan participants have increased their contributions in the past two years, so if you haven't done so, maybe now is the time.
Now, if you're interested in investing and want to choose your own investments, feel free to put some extra money in an IRA. However, if you're among the majority of the population who prefers to take a more passive role in retirement planning, you may want to contribute a little bit more to your 401(k), even beyond what your employer is willing to match.
Under the 2014 tax law, the IRS allows for elective deferrals of up to $17,500 into a 401(k), or $23,000 if you're over 50. And this doesn't count the money your employer puts in or any mandatory contributions you've made.
While the math behind compounded investment returns is beyond the scope of this article, as a rough estimate, here is a quick way to estimate the long-term potential of your retirement investments.
An annual return of 7% is a conservative but reasonable estimate (the S&P 500 has averaged 9.6% over the past 20 years), so for a rough idea of what kind of performance you can expect over a 30-year time frame, take your annual contribution (yours plus your employer's match) and multiply by 100. For example, if you contribute $10,000 per year for your retirement, it is reasonable to expect it to grow to about $1 million in 30 years, so long as you keep your annual contributions the same.
So think about your retirement goals and adjust your savings accordingly.
Talk to a professional
In a recent Schwab Retirement Plan Services survey, only 39% of retirement plan participants said they were extremely or very confident in making their own investment choices, but 70% said they were confident in a financial professional's ability to do so.
One of the best benefits of many 401(k) plans is free access to investment professionals who can help tailor a plan to meet your specific goals and risk tolerance. During the open enrollment period, the professional will often come to your office and meet with members.
However, far too few people take advantage of this opportunity. In fact, people are more likely to let someone else change their oil, do their taxes, or landscape their yard then they are to let them pick their 401(k) investments. More than three-quarters of retirement plan participants report that they chose their own investments.
Are your beneficiaries in order?
While this doesn't happen too often, sometimes life changes make it necessary to change your beneficiaries. Maybe you got married since you started at your company. Maybe you got divorced. Or maybe you had another child you'd like to name as a beneficiary.
While you're looking at the rest of your retirement plan, now is a good time to look at who your listed beneficiaries are and see whether you need to make changes.
Basically, the open enrollment period is an excellent time to make sure your retirement plan is on track to achieve your long-term goals. So spend a little time going over where you stand and any changes you may want to make. It could really be worth the effort in the long run.
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