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By Suze Orman
For many workers, October is when your employer offers an “open enrollment” window for a few weeks to update and review your benefits.
I know that it’s tempting to just ignore all the emails and seminars and just leave things as they are. Life is busy enough.
But when it comes to saving for retirement, open enrollment season is a smart time to take a few minutes to give your savings plan an annual checkup.
Here’s what to focus on to increase the likelihood you will land at retirement in solid financial shape:
If you waited until your 30s or 40s to get started saving for retirement, your total annual contribution rate should be 15% of your salary to give you the best shot at having enough saved up to live comfortably when you retire.
If you’re saving less, try to make the full jump ASAP. But if that’s not practical, make it a goal to increase your savings rate at least one percentage point each year. And when you get a raise, earmark at least half of it for retirement savings. For instance, if you get a 4% salary boost, immediately increase your retirement plan contribution rate by two percentage points. Your human resources contact can direct you on how to go about raising your contribution rate.
From time to time, you may need to “rebalance” your investment portfolio to bring your mix of stocks and bonds in line with your strategy. For instance, if your goal is to have 80% invested in stocks and 20% in bonds, and you haven’t checked your mix for a few years, you may find it is now closer to 90% stocks and 10% bonds. It’s easy (with no added tax bill) to shift money out of your stock funds and into your bond fund. Some plans offer automatic rebalancing—check if you can sign up for this service.
If checking your investment balances isn’t something you’re familiar with doing, your investment plan likely has a target date fund (TDF). A TDF handles the asset allocation decisions for you. It sets the percentage of stocks and bonds based on how many years you have until retirement—generally, age 65—and gradually shifts the mix (to allocate for more bonds and less-risky options) as you near retirement. All TDFs automatically handle rebalancing as well. A TDF can work just fine when you are younger. But once you near retirement, I hope you will take a more hands-on approach to fine tuning your asset allocation.
Many workplace retirement plans now offer two ways to save. In addition to the traditional 401(k) or 403(b), you may now have the option to save in a Roth 401(k) or 403(b).
If your plan offers a Roth, I highly recommend you consider allocating future savings to the Roth, rather than the traditional. There is no tax deduction for the money you contribute to a Roth, but in retirement your withdrawals will be 100% tax free. I think building up a pot of tax-free retirement money is wise, especially if you already have done a lot of saving in a traditional 401(k). While the traditional 401(k) delivers an upfront tax break—contributions reduce your taxable income for that year—you will owe income tax on every dollar withdrawn in retirement.
Please be careful: I am not suggesting you convert the money you have saved in a traditional account into a Roth account. Some employer plans allow this, but it will trigger a tax bill in the year you make the change. (If you are interested in a traditional-to-Roth conversion, I highly recommend consulting with a tax pro first.)
What I want you to do is simply switch your future contributions into a Roth account. That’s a smart way to start accumulating retirement savings that will not be taxed when you eventually make withdrawals.
Everyone is eligible to contribute to a Roth 401(k), regardless of income level.
I think saving for retirement in a Roth is so valuable, that I want to share some strategies if your workplace plan doesn’t offer a Roth 401(k) option.
If your work doesn’t offer a Roth option, but does offer a company match: Make sure you contribute enough to your traditional 401(k) to collect the maximum company match. But only enough to get that match. Then, I want you to focus on doing more retirement savings in a Roth Individual Retirement Account (IRA). See the next piece of advice for more details on Roth IRAs.
If your work doesn’t offer a company match or a Roth option: I would first consider putting your retirement savings into a Roth IRA if you meet the income limits. In 2021, an individual with income below $125,000 and couples with joint income below $198,000 can contribute $6,000 to a Roth IRA. ($7,000 if you are at least 50 years old.) If you want to save more—good for you! — then go back and save in your workplace plan.
And I want to be clear: While I think using a Roth 401(k) or Roth IRA is a great way to save for retirement, the big picture is to save, period. A traditional 401(k) is still a fine way to save for retirement. It’s just that I think a Roth are even better. Continue learning with a free sample of my audiobook, The Ultimate Retirement Guide for 50+.
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