This article was last updated on December 2
When the economy and stock markets tanked many people stopped contributing to their employer sponsored 401K or self managed IRA plans. However, with markets back up strongly and the economy improving, folks must not forget to restart or continue saving for their financial futures. This includes taking the following actions:
1. Start saving —Now!
Why? Because compound interest can be your best ally when it comes to boosting your retirement accounts over the mid to long term. Through the magic of compounding, returns on savings are plowed back, accelerating the growth of principal. Even if you lost a lot when the stock markets crashed or just missed the gains over the last few years, compounding can help get your retirement accounts back on track over the next 5 to 10 years. But you need to start sooner rather than later.
2. Automatic saving
The biggest obstacle to saving for your golden years through a 401(k), IRA and other tax-advantaged retirement accounts is to actually get started and finding some money after all your expenses. This is where automatic saving can force you to put away a little bit from every paycheck. Fill out some simple paperwork with your company and/or financial institution and have money automatically transferred from your paycheck (for a 401K) or savings account (for an IRA) each month on a designated day
3. Don’t Forget the Company Match
Most companies now offer their employees a match for their 401(k) contributions. Typically, the company will kick in 50 cents for each dollar that a worker saves, up to 6% of his or her salary. So if you contribute 6%, you are essentially getting 9% into your retirement account with the company match. Bottom line: At least contribute enough to your 401(k) to get the company match (=free money)
4. Are the Fees Eating Your Savings?
How much you pay in retirement fund fees is critical, because overpaying can seriously erode your nest egg. According to Morningstar, the expense ratio (fees to operate fund) of the average domestic stock fund is 1.39%; for bond funds, it’s 1.05%. Your goal should be to find funds in your 401(k) lineup that cost less than that, if there are any. You can find your fund’s fees on their website or their quarterly/annual statement.
5. Keep it Simple with Rollovers
A lot of people have many small 401K and IRA accounts from various jobs they had. Not only is it a hassle to keep track of these, but likely your returns are being eaten by fees and limited investment options. The best thing to in this situation is roll over your various retirement accounts into a single IRA. To open one, contact an established financial institution, like Vanguard or Fidelity, for the documents needed for the transfer. If you’re tempted to spend the money from a rollover instead — don’t. You’ll trigger a tax nightmare and owe a 10% early-withdrawal penalty, as well as federal, and where applicable, state taxes on the windfall.
6. Consider a Roth IRA
If you have funds in a traditional IRA account, you may want to consider converting them to a Roth IRA. But you will need to plan ahead and be aware of taxes from this conversions and think about other ways to reduce your tax liability.