Many people find it intimidating to think about saving for retirement, especially when you consider some of the massive sums of money that financial advisors think you need to accumulate over your career. Yet there's one aspect of making the most of your retirement savings that's incredibly simple to understand, and just taking a few simple steps can easily add $100,000 or more to your eventual nest egg when you finally decide to take the leap and retire.
The problem is cost
Most workers know that saving for retirement through a tax-favored retirement account like a 401(k) plan at work carries substantial benefits. Upfront tax breaks on contributions and tax-deferred growth throughout your career can boost your savings to much higher levels than you'd be able to achieve in a regular taxable account.
Yet one of the biggest drains on 401(k) account balances comes from the fees that many employer plans charge. One study from a few years ago took the example of a two-earner household earning the median income over a 40-year career, starting by saving 5% of their salaries and steadily increasing that amount to 8% later in their careers. What the study found was that such a couple could expect to pay almost $155,000 in fees, reducing what would have been a $510,000 account balance at retirement to less than $355,000. Another example that looked at higher-income earners in the top 25% of the income spectrum could lose almost $280,000 to fees.
The worst thing about this result is that the study assumed that the 401(k) plans just charged average amounts of fees. For many workers, many options on their 401(k) investment menus have above-average fees, which eat even further into your savings.
3 simple steps to turn the fee tide
Fortunately, most people have ways they can address the fee problem. Following these three steps can get you moving in the right direction.
1. Look at your plan's investment options.
Most 401(k) plan investment menus have only a fixed number of options available, so you aren't completely free to choose the lowest-cost investment possible. However, even those 401(k) plans that are full of high-fee choices often include at least one or two lower-cost index-fund alternatives. Take a few minutes and have a closer look at the menu your 401(k) offers to identify the lowest-cost choices available.
2. Start moving money into cheaper investments.
Once you've figured out which investment options will cause you to lose less to fees, start moving your money toward those choices. It's important not to let fees be the only factor in this decision, as you need to maintain an appropriate asset allocation that gives you the right mix of stocks, fixed-income, and other types of investment assets that can combine to give you a stable but profitable portfolio. Nevertheless, the sooner you can divert money toward cheaper options, the more of your hard-earned money you'll keep in your pocket, and the less you'll lose to the fund companies that manage your money. Many plans will let you make these changes online, taking just a couple minutes.
3. Consider low-cost IRA rollovers from 401(k) plan accounts.
While you're working, you typically have little or no ability to move money out of a current 401(k). Once you leave a job, though, you have the right to roll over your 401(k) balance, either to another 401(k) plan account with your new employer or into an IRA that you can manage yourself. In many cases, the IRA is the best choice, as it gives you complete flexibility to choose the lowest-cost investments available rather than being stuck with a limited menu of choices. If you're fortunate enough to have good options in your new 401(k), though, a rollover to your new retirement plan account could be the smartest move. Again, many IRA providers offer an online method for making these transfers, taking as little as five to 10 minutes to open an account and get money moving in the right direction.
Saving for retirement is smart, but getting taken advantage of by financial institutions charging high fees isn't. By following these three simple steps, you can get yourself on a path that could save you hundreds of thousands of dollars over the course of your career.