By Alessandra Malito, MarketWatch
No matter how the markets are behaving or what is happening in your life, there’s always a way to ensure your 401(k) is working for you.
Not everyone has access to a 401(k), but those that do say the defined-contribution plans will make a difference in their future. More than three-quarters of U.S. households said they think 401(k) and similar plans have the potential to help them meet their goals in retirement, according to a 2018 Investment Company Institute household survey. Approximately 55 million Americans have a 401(k) plan, and 84% of households with at least one account said they were confident about their future retirement .
Still, not everyone is as sure of how to save in one — what with other financial responsibilities, like paying off student debt and spending money on rent, utilities and groceries. Here are a few ways to make the most of your 401(k), and have it work for you no matter what the scenario:
Rebalance your portfolio
Many 401(k) plans have automatic rebalancing available, so that portfolios never stray too far from the asset allocation they were assigned as a result of market volatility or movement. “Choosing one of these investment options means that their 401(k) account will systematically sell high and buy low, and makes it a truly set-it-and-forget-it system that is actually effective,” said John Scherer, a financial adviser and founder of Trinity Financial Planning in Middleton, Wis.
One effective way to rebalance is to use a target-date fund, which automatically does the rebalancing for you, said Amy Shepard, a financial planning analyst at Sensible Money in Scottsdale, Az. A target-date fund is an investment tied to a particular retirement year. As that year gets closer, the portfolio is automatically adjusted to become more conservative, in an attempt to mitigate any risk to the assets near retirement. Target-date funds are a solid option for beginners, though not everyone may want one as it takes away some of the personalization of the account (and could leave people invested more conservatively than they’d like in the 10 or 15 years before their retirements).
Don’t try to do it all
Many employers and 401(k) providers offer automated tools to take the busy work out of investing for retirement. There are rebalancing options, but also automatic enrollment features available for many plans, which allows individuals to seamlessly contribute to a plan without ever having to set up a transfer.
Companies are starting to take automatic enrollment more seriously, and some are even implementing auto-escalation, so that contributions are steadily increased every year or so.
Automatic enrollment is helpful in getting people past the paperwork of setting up an account, but employees shouldn’t stick to the starting contribution rate picked by their employers for too long — or they may end up with less in retirement than they need. Employers typically place an employee into a plan with a 3% to 5% contribution rate, but advisers often suggest saving triple that, to the tune of 10% to 15%. Shepard suggests upping the contribution rate 1% every six months, for example. “This is such a huge benefit because it allows you to put your retirement savings on autopilot yet still save more over time, without much effort,” she said.
Consider a Roth version
A traditional 401(k) is funded with pretax dollars, which means future withdrawals are taxed. Comparatively, a Roth 401(k) plan is funded with after-tax dollars, where the contribution may be less than if it were a traditional account but allows future withdrawals to be distributed tax-free. There are a few considerations to make before choosing one over the other, including current and estimated future tax brackets, receiving or delaying tax deductions now or in the future and how you may intend to spend down these accounts later in life.
Don’t get too attached
Less action is often more valuable to a 401(k), except for a few emergency situations when asset allocations are off and the market volatility may affect an upcoming retirement. “Individuals should set their contribution percentage and target asset allocation and then log into their account as little as possible throughout the year,” said Mike Giefer, a private wealth manager at Creative Planning in Minneapolis. This is especially true during intense market volatility.
Rally before the end of the year
With autumn upon us, now is a good time to clean up a 401(k) and make a plan to maximize your contribution, said Peter Hoglund, a financial adviser at AEPG Wealth Strategies in Warren, N.J. The deadline to contribute to a 401(k) is typically Dec. 31, though some exclusions may apply.
There are also a few lofty goals to consider, including maxing out the account, said Marianela Collado, a financial adviser at Tobias Financial in Plantation, Fla. Individuals can defer $19,000 of their wages into a 401(k) in 2019 (and $25,000 if they’re 50 or older). Although the feat seems difficult to accomplish — 13% of people maxed out their Vanguard 401(k)s in 2017 — some savers say it’s just about making lifestyle adjustments. Some companies also allow individuals itching to save beyond the limit to contribute with after-tax dollars (many 401(k) plans are tax-deferred, which means contributions are made with pretax dollars).