Since the advent of defined contribution plans 30 years ago, the responsibility of saving for retirement has fallen largely on employees’ shoulders. Many employers are freezing or terminating costly pension plans in favor of 401(k)s and similar plans, according to a Prudential Financial Inc. survey.
If you’re looking to catch up or get ahead on saving for retirement, there are steps you can take to do that, including the five that follow:
START SAVING EARLY
Young savers tend to get overwhelmed by choices rather than just starting to save, said Chris Carosa, a financial journalist and author.
“This so-called ‘paradox of choice’ occurs when too many choices cause people to delay decisions,” he said. “In reality, it’s better to just start saving with no undue emphasis on investing. Time heals all poor investment decisions, so the earlier you start saving, the less critical investment performance will become.”
One option, especially for younger 401(k) participants who have few or no outside investments, is a target date fund. Some target date funds are good. Others are not. However, participating in one of these funds can be a good first step toward an instantly diversified portfolio for younger savers. Over time, as the savers gain investing experience and confidence, they might consider other choices in the plan.
COMMIT A PERCENTAGE OF YOUR INCOME
Saving a percentage of your income can allow you to start out small, without feeling the pinch when you get a raise, said financial planner Sterling Raskie. Anything to make saving automatic and painless is generally a good idea.
“In other words, if a person saves 10 percent of their $50,000 salary, they’re saving $5,000 annually,” he said. “As they get raises to $55,000 or $60,000, their savings automatically increase, versus having to remember to raise by a fixed dollar amount — which most folks won’t remember to do.”
PRETEND BONUSES NEVER HAPPENED
If you come upon a bonus at work or other windfall, resist the temptation to spend it. Instead, put that money toward your 401(k). Since your monthly budget likely wasn’t already accounting for a sudden boost in income, you won’t miss the extra dollars from your checking account.
TAKE ADVANTAGE OF AUTO-ESCALATION
A plan with an auto-escalation feature is one relatively painless way to increase your contributions. “Many 401(k) plans allow you to set up an automatic increase so that the percentage you are saving increases at a certain interval — like every six months or 12 months,” said financial planner Katie Brewer. “For example, if you started with a 3 percent contribution rate and set up an automatic contribution increase of 2 percent every six months, you would be up to 11 percent contribution in two years — and you would barely even notice it.”
REDUCE THE COST OF YOUR 401(k)
The average worker pays an estimated $138,000 in 401(k) fees in a lifetime, according to nonpartisan policy institute Center for American Progress. Although you might not be able to control what plan your employer offers, try to reduce your investment costs as much as you can.
“Funds with low expense ratios tend to outperform funds with higher expense ratios,” said Mike Piper, an accountant and personal finance author. “So it often makes sense to pick the lowest-cost fund in each of the categories you want to use in your 401(k) — as opposed to, for instance, picking based on past performance.”