Keeping track of your 401(k) balance isn’t just about eyeballing the lump sum you’ve socked away in your retirement savings account. What you’ve saved is a key measuring stick to help you figure out whether you’re on track to reach your savings goal and cover your spending needs once you stop working.
And what better time to review the current health of your 401(k) and take charge of your financial future than National 401(k), the Sept. 6 day set aside on the calendar to focus on retirement planning and preparation.
Lisa Featherngill, national director of wealth planning at Comerica Wealth Management, spells out the importance of keeping regular tabs on your 401(k) by sharing a quote from Yogi Berra: "If you don’t know where you are going, you’ll end up someplace else."
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What you can learn from your 401(k) account balance
It’s important to review your 401(k) balance regularly, as it likely represents a significant portion of your retirement savings. “Staying on top of your balance, plan contributions, and performance is essential to staying on track with retirement planning,” says Featherngill.
Knowing your balance today, however, doesn’t tell you much on its own about retirement readiness.
“First, you need to know your retirement number – or how much you need in retirement,” says Featherngill. Everybody’s magic number is different, of course. But for most Americans, the number tends to be sizable, and getting there requires a disciplined savings and investment strategy. Workers with 401(k)s, for example, responding to Schroders 2024 U.S. Retirement Savings Survey believe they will need $1.2 million saved to retire comfortably. A study by Northwestern Mutual released in April put the magic number at $1.46 million. And Charles Schwab’s 401(k) plan participants said earlier this summer that it will take $1.8 million.
Once you come up with a retirement savings target, check to see if your current balance and future return projections stacks up against your goals, says Eli Taylor, private wealth advisor at U.S. Bank Private Wealth Management. “Think of this as a financial wellness checkup,” says Taylor.
Taylor recommends using one of the free online retirement calculators, which project future account balances using annual investment return estimates and years until retirement, to get an idea if your savings are on pace or if you need to make adjustments. If you’re on track, great. Keep up the good work. However, if you’re falling behind, there are adjustments you can make to your 401(k) savings, even small ones, that can make a substantial difference to your bottom line over time.
“Consider upping your contributions or looking into investment options that might offer higher growth potential,” says Taylor. “It’s also important to make sure you are contributing enough to get the full employer match if your company offers one. If you are not yet able to max out your contributions, consider small, gradual increases. Most plans have the option to automate these increases. Even a 1% increase every year can make a meaningful difference over time.”
Here's what else to include in your 401(k) tune-up.
Calculate how much you can save
The more you contribute to your 401(k) each paycheck, the better. But maxing out might not be possible for many savers. And you want to make sure your retirement savings plan contributions don’t cause a cash flow crunch.
“I suggest maximizing your 401(k) to a point where it still allows for bills to be paid each month and some savings outside of your retirement plan,” says Steven Conners, founder and president of Conners Wealth Management. “You shouldn’t ever be 401(k) poor. You (can) over invest by not leaving a comfortable cushion for emergencies and discretionary spending.”
That said, check to see you are at least saving enough in your 401(k) to take advantage of your employer’s matching contribution, says Doug Roller, owner and investment advisor representative at Crossroads Financial Group. “It is essentially free money added to your retirement savings account,” he said. You should shoot to save 15% of your salary (including your company match), personal finance experts say. “If you’re behind on savings, consider increasing contributions beyond this level,” says Roller.
Once you hit 50, you are eligible to make “catch-up” 401(k) contributions. “This can be a great way to make up for lost time, especially if you got a late start on your retirement savings,” says Taylor. For 2024, the catch-up contribution is an extra $7,500 on top of the $23,000 limit for everyone else, for a total of $30,500.
Analyze the performance of your fund holdings
Hitting your retirement number in the future requires that your money is working hard for you. That means the mutual funds you invest in must deliver solid performance. Ideally, you’ll want to own funds that keep pace with a market benchmark like the S&P 500 or funds that invest in similar types of investments. So, take the time to make sure your funds are not lagging the market or the competition.
“Most investment companies post the returns of the funds in retirement plans as well as appropriate benchmarks on their website,” said Featherngill. Try not to focus on short-term performance, as it offers too limited a snapshot of a fund’s performance. Instead, “try to focus on longer term performance – at least three years – in determining whether the fund is keeping up,” says Featherngill. “If it’s not, see what other options are available.”
Also review your 401(k) to see if there have been any changes in the fund lineup offerings, advises Tim Steffen, director of advanced planning at Baird. If a fund you owned has been replaced with a different fund, “review your options to make sure you’re comfortable with how your account is invested,” he said.
Review your asset allocation
Check to see how much of your portfolio is invested in stocks and bonds. Stocks offer the most growth potential, while the typical role of bonds is to generate income and provide diversification. You want a mix that matches your risk tolerance and time horizon until retirement.
“Asset allocation, or asset mix, has a significant impact on your rate of return,” says Featherngill. So, make sure your portfolio has adequate growth potential to help you reach your goals. It’s prudent to do a quarterly, semi-annual, or annual review of your asset mix to ensure that it hasn’t strayed too far from your financial plan’s predetermined weightings. If there is a significant move (up or down) in one asset type versus another, it can be easy for the account to drift from your target allocation and pose more risk than initially designed. So, if your portfolio is out of whack, it’s time to rebalance and get back to your optimal weightings.
“If your strategy is 60% stocks and 40% fixed income, you may start the year with this allocation,” Featherngill explains. “However, if stocks have a great year and bonds are flat, your allocation won’t be 60/40 at the end of the year. Rebalancing forces you to take some gains off the table (in stocks) and invest in (other assets you own, such as bonds), at lower prices.
Review and update your beneficiaries
Life changes like marriage, divorce, or the birth of a child mean it’s time to update your beneficiary designations, says Taylor: “Don’t overlook this step, as it ensures your 401(k) assets go where you want them to.” And don’t forget this key point, adds Taylor: “Your 401(k) beneficiary designations override your will, so if they’re outdated, your assets may not end up where you intend.”
Bottom line
401(k) Day is a great time to educate yourself about your investments. “If you are not feeling confident about your investment choices, take advantage of the educational resources your 401(k) provider offers,” says Taylor. “Or consider picking up a book to deepen your understanding. If managing your investments feels overwhelming, look into options like target-date funds or robo-advisors that can do the heavy lifting for you. These options adjust your asset allocation (for you) based on your expected retirement date, helping you stay on track with minimal effort.”
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