Writing about retirement matters can be depressing. Very often, you end up pointing out how ill-prepared many of us are for our golden years, and that many of us may have to work for most of our lives, living a less cushy retirement than we'd hoped for -- maybe even a gruesome one. Sigh.
But here and there you'll run across bright spots -- uplifting bits of news. For example, one retirement development I've been applauding for quite a while now is the growing implementation of automatic 401(k) enrollments by many employers.
That means that the big chunk of workers who would otherwise never get around to setting up these important savings accounts simply have the accounts set up for them, automatically. The onus is on them to opt out of it, and that's something many of them won't get around to, either. This has led many companies to go from a 60% or 70% participation rate to a more-than-90% rate. That's great, since 401(k)s can be powerful growers.
New tools to save more
So imagine my delight when I recently learned about two more exciting developments: automatic escalation and automatic rebalancing in 401(k)s. With auto-escalation, as you might suspect, your employer will automatically ratchet up the percentage of your salary that gets saved and invested from year to year. You might start with 3%, for example, and 10 years later be saving 13%.
With rebalancing, your holdings are adjusted regularly to fit a certain allocation model that you pick. If you want 65% of your money in domestic stocks, for example, and your account ends a quarter with 71% in domestic stocks, some will be sold and reinvested in your other categories, to reestablish the mix you wanted.
Be warned ...
Know that the automatic 3% withdrawal from your income that many plans start you off with won't build you a big nest egg very quickly. Set it to at least 10%, if you can -- and you might need a higher saving rate, too. Gradual increases are nice, but remember that your earliest dollars will likely grow the most for you, so try to plow a lot of money in early. Also, many employers don't yet offer escalation -- so tend to it yourself if you need to.
Rebalancing can be helpful, but it can work against you, too. If your stock funds are on a roll and you have many years until retirement, you might be better off letting them grow without trimming them back. Aggressive rebalancing can mean that you keep taking money away from your best-performing investments.
Assess your situation regularly, making sure you have the mix you want -- of stocks, bonds, international holdings, and so on. It can be effective to hold a range of different-sized companies, including:
- Large caps such as Verizon (NYSE:VZ) and Schlumberger (NYSE:SLB).
- Smaller enterprises such as Hasbro (NYSE:HAS) and Newell Rubbermaid (NYSE:NWL).
- International outfits such as America Movil (NYSE:AMX) and BP (NYSE:BP).
A final warning is this: Don't own too much of your employer's stock in your overall portfolio. You have the advantage of knowing a lot about the company, true, but even seemingly strong companies can implode (think Enron), and other companies can fall on hard times and file for bankruptcy protection, as Kmart did before merging into Sears Holdings (NASDAQ:SHLD).
Take action
So even though new automatic plan options should help savers overall, don't assume that they'll work perfectly for you. To really optimize your retirement, you should take some time to learn about how to make the most of your 401(k) plan (and other retirement accounts as well), and be sure to have a sensible overall retirement plan.
You're never too old to start investing. If you're showing up late to the party, Chuck Saletta can help you get back on track.
