Retirement Success and Your 401(k)

For National Retirement Security Month, we checked in with our advisors for their best advice on reaching retirement savings goals. Their top tips boil down to a couple of simple yet often overlooked actions for employees and employers:

Deferral rates

Most people ought to contribute the maximum. The power of compounding is amazing, and you need to put it to work for you starting as early as possible. People typically don’t think hard enough about how much they will need to retire and how long it will take to save and invest enough to have financial security.

If you cannot do so now, try to at least contribute the amount to get the full employer match. It is “free” money. Make sure you understand the matching level and vesting schedule. Then work your way to the maximum depending on cash flow needs.

But remember, making a deferral does not mean you’re automatically investing the funds — it’s a two-step process. You have to choose your deferral amount/percentage, and you have to choose your investment options. A common mistake is leaving contributions in cash because you have not selected an option. You need to select a portfolio that will provide the growth needed to meet your retirement goals. If you don’t understand the investment options, call the retirement plan provider and ask them to walk you through the options.

The Retirement Program

Of course, in order to have great options and matching for employees, plan sponsors should make sure they are providing a high-quality program, which will necessarily include:

• Portfolio options which feature broad diversification, low cost, and a menu of choices which include substantial allocations to equity, up to 100%. For many participants this is very long-term money, and only a small fraction of what they will eventually save is in there now. They typically can afford to take risk, and they need a lot of equity to potentially generate the long-term return they need to succeed.
• A program of education and communications reinforcing the need to make substantial contributions, starting right now, and commit to a portfolio with enough equity to meet their retirement goals. Don’t try picking funds or timing the market — set it and forget it, and don’t worry, in 20–40 years you will a happy camper.

This month is a good reminder to make sure we are taking these steps towards providing for our security in retirement!

Team Hewins, LLC (“Team Hewins”) is an SEC-registered investment adviser; however, such registration does not imply a certain level of skill or training, and no inference to the contrary should be made. We provide this information with the understanding that we are not engaged in rendering legal, accounting, or tax services. We recommend that all investors seek out the services of competent professionals in any of the aforementioned areas. Opinions expressed in this blog are solely of the author and interviewee and not of the firm.