Most of us are woefully unprepared for retirement, yet the steps to financial security are simple. Here are the rules retirement experts say you should follow.
[Related content: 401k, retirement, financial planning, retirement planning, investing strategy]
By MarketWatch
When it comes to saving for retirement
More than 54% of Americans report that the total value of their household savings and investments, excluding the value of their primary homes and any defined-benefit plans, is less than $25,000, according to the Employee Benefit Research Institute's
Yes, those figures include Americans young and old, those just heading into the working world as well as those about to check out of it. But in the main, Americans need to modify their savings and spending patterns to have any hope of enjoying a standard of living to which, rightly or wrongly, they've become accustomed.
It's not rocket science, at least not according to experts. Here are some nest egg do's and don'ts from Hewitt Associates and Merrill Lynch.
1. Participate in your plan
If you're lucky enough to have a 401k at work, contribute to it. That will greatly improve your financial well-being, according to Bank of America Merrill Lynch, which recently introduced a new tool designed to monitor and score the "financial wellness" of 401k plans in general and, by extension, the employees who participate in them. The new tool looks at four plan-participant behaviors: saving, investing, setting and monitoring retirement goals, and nest-egg preservation. Not surprisingly, savings and investing behavior -- which represent 80% of the overall score -- are the primary drivers of financial wellness.
Fulfilling Retirement
According to Kevin Crain of Merrill, the healthiest 401k plans
He said the healthiest 401k plans automatically enroll employees, automatically increase the percentage contribution made by salaried employees on a regular basis and provide investment advice to workers.
2. Avoid risky behavior
In Merrill's new index, participants can receive a wellness score on a scale of 0 to 10, with 10 being a perfect score. Points are deducted from the overall wellness score of each participant based on symptoms associated with "at risk" behaviors.What are those risky behaviors for which you might get dinged?
- Having an outstanding loan that represents 25% or more of your total 401k account balance.
- Not having requested a proposed investment strategy.
- Not using asset-allocation or target-date funds.
- Concentrating in specific asset classes.
- Concentrating in company stock.
- Not taking full advantage of the company match.
- Saving 2% or less.
These behaviors each cost you at least one point off the overall score.
3. Increase your contribution rate
If you are participating in your 401k, consider upping the percentage of your contribution, according to Hewitt. Workers contribute on average 7% of their salary to a 401k, but every little bit matters.Crain, for instance, reports that workers with the healthiest 401k plans contribute 8.5%, on average, to their accounts, while workers in the least healthy plans contribute just 6.5% on average. For its part, Hewitt noted in a release that contributing just 1% or 2% more of your salary to your 401k can have a dramatic effect on your retirement savings.
Hewitt said that a 30-year-old employee earning an average salary of $50,000 who increases her contribution rate from 4% to 6% will have accumulated an extra $295,000 by the time she reaches retirement age.
Continued: Don't put your plan on autopilot
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4. Put your plan on autopilot
Face it, when it comes to saving, inertia often gets the better of us. If you contribute 6% to your 401k, it's likely to stay that way even if you get a raise. But according to Hewitt, you should consider taking advantage of any and all tools that take the guesswork out of saving and investing.Consider signing up for automatic escalation and automatic rebalancing tools if your employer offers such options.
5. Take advantage of advice
The median annual return for employees using investment help was almost 2% higher than those who did not, according to a joint study from Hewitt Associates and Financial Engines.Merrill's Crain is in agreement about the benefits of advice. In Merrill's world, 401k plans that offered advice to participants had higher wellness scores than those that didn't offer advice -- 8.5 to 6.2.
According to Hewitt, half of the companies in its survey offer online investment guidance, and 39% offer online third-party investment advisory services. In addition, 28% of employers offer managed accounts that let participants delegate management of their account to an outside professional.
6. Don't forfeit free money
It's hard to believe, but more than 25% of workers leave free money on the table, contributing below the company-match threshold, according to Hewitt. Contribute at least enough to your 401k to receive your full employer match.As the economy begins to recover, more companies are restoring their company matches. Hewitt research indicates that 80% of employers that reduced or suspended their matches in 2009 plan to restore them this year. Fidelity Investments has noted a similar trend among the 300 companies in its client base.
7. Don't cash out
If you're changing jobs or leaving your current job, don't cash out your 401k savings. About 46% of employees cash out, according to Hewitt. But doing so can have serious consequences.Typically, you'll play a tax on the amount withdrawn and a 10% early-withdrawal fee.
8. Don't overinvest in company stock
In Merrill's Financial Wellness index, you lose points for overinvesting in company stock, because doing so means that both your human capital and financial capital are tied to your employer. And if your employer goes belly up, you lose both your job and a good portion of your 401k.According to Hewitt, employees contributed on average 18% of their 401k money to company stock in February.
Hewitt recommends contributing no more than 10% of your 401k to your employer's stock.
This article was reported by Robert Powell for MarketWatch.
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