Another year around the sun means another year closer to retirement. For 401(k) investors who are behind on retirement savings and for those looking to get ahead in 2021, here are 6 ways that may jumpstart retirement savings in 2021.
#1 Contribute as Much to Retirement Savings as Possible
The IRS has new retirement plan contribution limits for 2021, and while most limits remain the same as last year, some plans will see a limit increase.
Employee 401(k) contribution limits for 2021 will stay the same as 2020 — at $19,500. This applies to 401(k), 403(b), most 457 plans, and the federal Thrift Savings Plan.
For those age 50 and older, the 401(k) catch-up contribution is $6,500.
If you’re 50 or older and need to catch up on your 401(k) retirement savings, the amount you’re able to save remains unchanged at $26,000.
If you turn 50 anytime during December of 2021, you’re still eligible to contribute the additional $6,500.
#2 Fund an IRA in Addition to Your 401(k)
Whether you have a 401(k) or similar workplace retirement plan or not, consider opening an Individual Retirement Account (IRA) to diversify your investment portfolio while reducing your taxable income.
If you’ve changed employers in the past and had a 401(k) with them, it’s likely you have some retirement savings accumulated.
If the balance is over $5,000, you can take your 401(k) plan(s) from previous employers and roll them over into an IRA. This will make tracking retirement spending much easier.
If your old plan balance is between $1,000 and $5,000 and the company is forcing you out, they must help you set up an IRA.
However, if your balance is under $1,000, the company can issue you a check and force you out of their plan.
If you decide to fund an IRA or roll over an older 401(k) into an IRA, make sure you select a plan with the lowest fees. Or seek third-party advice to make the best rollover decision possible.
#3 Invest Stimulus Checks and Tax Refunds
If you’re eligible for this latest round (or any future stimulus that might end up in your bank account) and/or get a tax refund this spring, set all or part of it aside for retirement.
This is an easy way to boost retirement savings without cutting your budget or reducing the amount you can spend each month.
Avoiding the temptation to spend all or part of it now may help increase retirement savings more than you think.
#4 Rebalance Investments Quarterly
If you’re a 401(k) investor and have been told a set-it-and-forget-it strategy is best when it comes to 401(k)s, we encourage you to rethink this advice.
Saving for retirement is a long-term game.
However, this buy-and-hold strategy often causes investors to potentially miss out on earning more and keeping more of their hard-earned retirement savings.
The investments you initially chose to help you meet your retirement goals–whether that was 3 years ago or 5 months ago–may no longer be the best alternatives for you now.
When you take into consideration changes in market conditions, trade policy, and consumer sentiment, investments that were right for you in the past may not be now.
Morningstar conducted a study that monitored the top 100 best-performing mutual funds between January 1, 1998, and December 31, 2013.
This study revealed that, in any given year of top best-performing 100 mutual funds in any of those years, in the next year, about half of the time, 8 out of 100 remained in the top 100 the very next year.¹
This is why we recommend you rebalance your 401(k) quarterly, or four times a year.
Rebalancing is the process of realigning the weightings of the assets (your investments) in the portfolio.
This can involve periodically buying and/or selling assets in the portfolio in order to maintain the initial desired level of asset allocation.
Maintaining an even distribution of assets–such as 50% stocks and 50% bonds–is also a key objective. This is why rebalancing your portfolio may need to take place from time to time throughout each year.
Discover why account balancing and allocation may affect 401(k) performance.
#5 Avoid Target Date Funds
Average investors are told the set-it-and-forget-it strategy is their best option for growing their retirement savings.
Which is why target date funds have risen in popularity over the years. However, according to Rob Arnott, chairman of the board of Research Affiliates, target date funds are “a trillion-dollar industry based on ideas that were never tested.”²
Target date funds, also referred to as lifestyle funds and retirement date funds (you may know them as 2030, 2040, and 2050 funds), are structured to automatically reallocate as you move through different life stages.
So as you age toward retirement, the funds shift toward more conservative investments.
On the surface, target date funds take the pain out of how to choose the right investments for investors. You simply choose a single target date fund, set it, and forget it.
Investing in target date funds and sitting back and not actively managing your retirement account is like saying there’s a one-size-fits-all investment strategy that works for everyone.
Target date funds fail to take into consideration that not all investors are created equal.
Individual investors are placed into the same asset allocation regardless of their salary and savings history, risk tolerance, past investment performance, lifestyle, and goals.
Secondly, the reality is that target date funds will often underperform, and do not do a good job of managing downside risk during tough markets.
According to Morningstar analyst Jeffrey Holt in March 2018, “In the long run, the biggest risk in target-date funds is that they won’t meet investor expectations for avoiding losses.”³
If you are currently in a target date fund, we recommend you rethink this strategy.
Or, at least look inside your fund’s portfolio and make sure the portion of stocks to bonds is at a level you’re comfortable with, and you’re comfortable with the level of risk you’re taking.
If you aren’t sure what you’ve invested in, open up your statement and check, or reach out to your plan representative. In either case, we recommend seeking expert third-party advice on how to best allocate your assets.
Although you might have basic investment knowledge, utilizing an expert to do the in-depth market research could change the performance of your retirement savings accounts from good to great.
In fact, David Blanchett, Head of Retirement, CFP, CFA of Morningstar reported that participants that received expert guidance had as much as 40% more income during retirement versus those who received no help at all.⁴
Even though your 401(k) is employer-sponsored, it does not mean they’re taking care of your 401(k) for you.
It’s your money, and you’re responsible for your financial future.
If you’re hesitant to reach out for advice because you think your account balance is too small and you need more money saved, don’t let that stop you from getting help.
This is your future we’re talking about.
The sooner you seek expert advice, the higher the probability you’ll be better off in retirement.
401(k) Maneuver provides independent, professional account management to help employees, just like you, grow and protect their 401(k) accounts.
Our goal is to increase your account performance over time, manage downside risk to minimize losses, and reduce fees that are hurting your retirement account performance.
With 401(k) Maneuver, you can go about your life doing what you love with confidence, knowing we are handling the changes for you.
If you’d like to see how professional account management may improve your 401(k) account performance, check out our calculator.
Have questions or concerns about your 401(k) performance? Book a complimentary 15-minute 401(k) strategy session with one of our advisors.
This content was originally published here.