Let’s be honest – most of our New Year’s resolutions get thrown by the wayside a few months (or weeks, I’m not judging) into the year. Often times, this is because our resolutions are entirely too broad to actually be implemented in our daily lives. For example, stating “I want to be healthier” is a great goal, but may be better stated by planning to cook at home five nights a week or committing to going to the gym for 30 minutes four times a week. Being specific in our goals is the key to success.
The same concept applies to make your financial resolutions doable. When it comes to your 401(k) plan, my guess is that you set it up when you were first eligible to join your company’s plan, quickly filled out the paperwork, and maybe glance at your quarterly statement as you’re filing it away. Since we’re living longer and could spend over 30 years in retirement, our 401(k) account deserves an annual check-up and action behind it.
So how do you set realistic 401(k) resolutions this year? Here are three tips to try.
1. I will understand what investments I own and why.
Flip the ‘set it and forget it’ approach to a more active view, especially if your portfolio consists of one target-date fund. Since target-date mutual funds now hold over $1 trillion (a massive increase from $158 billion in 2008)1, it’s clear that many participants are using these strategies as an easy way to manage their retirement dollars – and for good reason. These funds can be an excellent choice for someone who is not necessarily comfortable choosing the individual funds they want to have in their portfolio. However, even if you do own a target-date fund, it should be your goal to understand what the fund is and why you are invested in that particular fund in your account.
Conversely, if you are the type of investor who likes to select your own funds, the best practice is to monitor and consider rebalancing your portfolio and adjust for any risk tolerance changes as you grow closer to retirement.
Whether you’re invested in a target-date fund or choosing your own funds, these assets are your dollars that you worked so hard to earn, so be active in reviewing your account at least annually. Even if you think your spouse “has it covered”, it’s your 401(k) and it’s important to take the initiative to understand the investments, just in case something happens suddenly to your spouse.
2. I will increase my contribution.
It’s rare that you find a retiree who says, “I wish I hadn’t saved so much money towards retirement”. A 2019 study from T. Rowe Price shows the median 401(k) deferral rate for male Baby Boomers is 10% and 8% for male Millennials. For women, the deferral rate is 7% for Baby Boomers and just 5% for Millennials.2 Many retirement plan experts recommend striving for a deferral rate between 10-15% of your income. Even though the percentage varies from person to person, the fact still stands – most people aren’t saving enough.
While some plans have an efficient option called ‘automatic escalation’ in place, which increases your contribution rate each year automatically for you, many plans don’t offer this feature. This means it’s up to you, as the participant, to consider increasing what you’re putting away in your 401(k) each year. If this feels next to impossible, consider increasing your contribution by 1% this year, then reevaluate next year and try for another 1%. Remember that your salary is likely increasing a bit each year and your investment contributions should grow as your income grows.
Keep in mind that employee contribution limits can change each year (for 2020 it’s $19,500 and if you’re over 50 years old, you are allowed a catch-up contribution of an additional $6,500), so make sure you don’t exceed those limits.
Another feature to monitor is an employer match. If your company offers one and you’re not contributing at least the full amount to receive your entire company match, you are leaving those dollars on the table. If it’s available to you, this is a valuable compensation offer in addition to your salary – don’t miss the opportunity!
3. I will update my beneficiaries on my accounts.
Your beneficiary is the person who receives the money in your 401(k) in the unfortunate case that you pass away. If you’re married, you are required by federal law to have the beneficiary listed as your spouse. If you decide you do not want your spouse listed as the beneficiary, this will require a signature (that may need to be notarized) from your spouse stating that they are aware they are not the beneficiary on the account.
Failing to list a beneficiary leaves your family without access to any funds until the probate court takes the case, evaluates all of the potential recipients in the situation, and assigns a beneficiary. Most don’t want this decision to be outside of their control. If you experience a life change of any sort or have not yet named a beneficiary, be sure to update your beneficiary information to avoid a potentially sticky situation down the road.
Picking one of these tips to start or any combination will make your financial resolutions doable and give you more confidence in understanding your retirement strategy. And think of how great it will feel to be able to say you’ve actually fulfilled a New Year’s resolution this year.
Hannah Walls, CRPS® – Retirement Plan Services Specialist
1Morningstar 2018 Target-Date Fund Landscape Report
2 T. Rowe Price, Retirement Savings and Spending 4: Financial Behaviors and Attitudes