Now that we’re past the midyear of 2014, it’s a great time to review your retirement savings plan to make sure you’re on track. If you’re not contributing enough or haven’t rebalanced your portfolio since George W. Bush was in office, you have the remainder of the year to make some adjustments.
You probably already know that you can sock away as much as $23,000, which includes $5,500 in catch-up contributions for people 50-plus, in your 401(k) plan. However, if you’re using the default option in your plan, the automatic payroll deductions may be stopping at $17,500, the limit for people under age 50, says Michael Falcon, head of retirement at JP Morgan Asset Management in New York.
With four months left in the year, it’s not too late to increase your contributions to reach the higher amount by the end of 2014.
Here’s another reason to give your retirement plan the once-over. You may be saving too much too soon. Stephen Lo, a Towson, Md., branch manager with Charles Schwab & Co., used this example:
Let’s say your employer matches up to 50 percent of your contributions up to 6 percent of your wages at each twice-monthly payroll period. If you’re earning $150,000, and you contribute 20 percent at each paycheck, you’d hit the maximum $23,000 limit by the end of September – and your employer would’ve kicked in about $3,560. Contribute in all 24 pay periods and your employer matches would total $4,500.
“By maxing out your 401(k) too early, you’re giving up employer match at each pay period” after you hit the limit, Lo says.
You could also inadvertently max out in your 401(k) amounts early if you’ve directed a bonus, or a percentage of one, into your plan.
“Sometimes a company will provide a match anyway but it may not,” says Stuart Ritter, vice president of investment services at T. Rowe Price in Baltimore. “So midyear is a good time to make sure your contributions are spread fairly evenly over the course of the year.”
On the flip side, if you’re not able to save the maximum amount allowed, then at least contribute enough to get the company match.
August is also a good time to review your investment strategy to make sure you’re positioned the way you want going into the third and fourth quarters of the year, says JP Morgan’s Falcon. Are you taking on an appropriate level of risk for your age and years to retirement? Are you a self-directed investor in that you rely on your own judgment and research to make investment decisions rather than seek professional advice?
“Research shows that people have a wider dispersion of outcomes” in self-directed accounts compared with professionally managed investments like a target date fund, Falcon says. “More than half will woefully under-perform because people won’t buy and sell or rebalance their funds.”
Melissa Spickler, managing director at Merrill Lynch Wealth Management in Bloomfield Hills, Mich., says rebalancing is typically recommended when your portfolio becomes too heavily weighted toward a certain class of stocks.
“If you’ve got investments in large caps that held a 20 percent position in your portfolio, it may have grown to be 35 percent to 40 percent of your portfolio because the market’s gone up so much,” she says. “Rebalance to make sure you have an equal weighting in four or five different sectors. Typically, people forget to do this.”
For workers within three to five years of retirement, a portfolio shouldn’t be too aggressive or risky because there’s not enough time to recover from market losses.
“Over time,” Falcon says, “a diversified balanced portfolio wins. You can’t control inflation or longevity. At the end of the day, the only thing you can control is how much you save and how you invest.”
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