A Not-so-automatic 401(k)
“Doing nothing can often work wonders” for your 401(k), said Dan Kadlec in Time .com. A recent survey by human resources firm Aon Hewitt found that a record 79 percent of workers who are eligible for a 401(k) plan or similar are now enrolled, “thanks in large part to the do-nothing magic of automatic enrollment.” But simply joining a plan isn’t enough. If you’re not actively managing your 401(k), you’ll likely fall short of your retirement goals. Take the fact that the average 401(k) account balance grew 10 percent from 2013 to 2014. That gain seems impressive until you realize that the S&P 500 went up 13.5 percent over the same period and Treasury bonds produced a 10.75 percent return. The problem is that many 401(k) participants stick with the “ultra-conservative” investment plans they were automatically enrolled in. According to Aon Hewitt, only 15 percent of savers rebalanced their portfolio last year for the ideal mix of stocks, bonds, and cash, “a fundamental aspect of long-term investing.”
Your salary contributions shouldn’t be on autopilot either, said Suzanne Woolley and Margaret Collins in Bloomberg.com. Many companies enroll employees at a default contribution rate of 3 percent, even though experts say the “magical retirement savings number” is more like 15 percent. If you’ve stuck with the 3 percent level “purely out of inertia” but your company offers a higher match, bump up your contributions to meet the match. When it comes time to switch jobs or retire, again, “most workers don’t do anything,” said Sharon Epperson in CNBC.com. Keeping several 401(k) plans from different employers might seem like the easiest thing to do, but it’s often “a big mistake.” When you have the option, rolling over a 401(k) to an IRA has several big advantages. IRAs offer “thousands of investment choices,” compared with the 20 funds offered by most 401(k) plans. IRAs also give you more control when it comes to trading and changing investments, making it easier to “tailor your retirement account” to your financial goals.
There’s one time you don’t want to touch your 401(k): when you need money, said Andrea Murad in Entrepreneur.com. Many plans allow “hardship withdrawals” to cover for emergency expenses, but the money is taxed as income and subject to a 10 per cent penalty if you’re under 59½ years old. You can borrow half your account balance, up to $50,000, but you’ll lose any investment earnings on that money while it’s not in your account. So if you’re tempted to make a withdrawal, try to remember your long-term goal: “not working one day.”
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