Tax-deferred saving through their employer is an essential part of most Americans' retirement plan. But is your retirement savings plan working as efficiently as it could be? If you're not sure, here are five areas where it may need improvement to be the most effective it can be.
1. Consolidating Old Plans. Many people who have changed jobs a few times over their careers have multiple 401(k) plans still sitting around. Because it's not mandatory to roll old funds into your new plan and some plans may even be set up automatically by new employers, old accounts often linger. But if you aren't coordinating investments, actively managing, or avoiding fees, you're losing money.
2. Getting All Your Match. Employer matches are basically free retirement money. This incentive, in which the employer contributes a percentage of what the employee contributes, is designed to encourage you to ramp up your savings amounts. Are you getting all available matches by your employer? Depending on how and when you contribute, you may leave money on the table.
3. Rebalancing Investments. Rebalancing is the act of assessing your investment types and percentages on a regular basis. If you don't rebalance the specific numbers within your retirement portfolio — the funds, stocks, and bonds — you may be missing out on profit margins as you fall behind trends and changes in the larger market. But rebalancing can be difficult, and an amateur may not rebalance to their best advantage.
4. Using Tax-Deferred and Taxable Options. Employer 401(k) plans and traditional IRAs are tax-deferred, meaning you get the tax savings now rather than when you withdraw the money. Roth IRAs and 401(k) plans provide no tax savings now but are nontaxable when you withdraw the funds. Should you use both means to avoid as much income tax as possible? And if so, what should your strategy look like? Tax planning is important to avoid losing money to Uncle Sam.
5. Automating Savings. Modern workers can help their own savings plans keep up by using automated options. For instance, many plans offer an option to automatically ramp up your contributions on an annual basis. You may also be able to use automatic rebalancing or reinvestment. By letting the system do some of the work for you, you won't lose momentum or efficiency even if you get busy with life.
Where to Start
Could your retirement plan use help getting more efficient in any of these areas? Then start by meeting with a financial planner who specializes in investment advising today. Together with your professional advisor, you will ensure that your money works as hard as you do.
To learn more, contact a local investment advisor today.