How to Revive Your 401(k) in Your 50’s
by Joe Cordaro
It’s never too late to rescue your 401(k) and boost your retirement savings.
Winning at retirement is all about playing your hand strategically. A 401(k) can be a trump card when used to its full advantage. Between high annual contribution limits – up to $18,000, or $24,000 if you’re 50 or older – tax-deferred growth and the potential for an employer’s matching contribution, 401(k)s are hard to beat as a retirement savings tool.
That doesn’t mean that every saver is realizing their plan’s potential, however.
According to Bank of America Merrill Lynch’s 2017 Plan Wellness Scorecard, one group lags behind when it comes to saving. Baby boomers are the least likely to contribute to their employer’s plan. Considering that roughly half of boomers have less than $100,000 saved for retirement, according to Pricewaterhouse Coopers, the pressure is on to step up their 401(k) game.
While that may take some effort, it’s not an impossible goal. “The remarkable thing about having a financial plan is that they’re dynamic and meant to be altered,” says James Barnash, a certified financial planner with SGL Financial in Buffalo Grove, Illinois. “While it isn’t good news that you’ve been neglecting your retirement savings strategy, you can usually do things to turn that around.”
If you’ve allowed your 401(k) to fall by the wayside, it’s time to get back on track.
Step up your contributions. The first step for revamping your 401(k) is reconsidering your savings rate, says Eric Hutchinson, managing director at United Capital in Little Rock, Arkansas. Hutchinson says many of the factors that affect your retirement – rate of return, global economic conditions and interest rates – are out of your hands. But, “how much you contribute to your 401(k) is one of the few things you can control.”
That amount depends on how much you estimate you’ll need in retirement, how much you currently have saved, your timeline until retirement and the rate of return you expect your investments to generate.
When in doubt, it’s better to err on the side of caution. “Contributing more is better than contributing less and if you’re not contributing the maximum your plan allows, consider increasing your elective salary deferrals,” Hutchinson says. At the very least, you should be saving enough in your plan to qualify for your employer’s matching contribution, if one is offered.
Don’t panic if you’re not able to max out your plan right away. You can still make a difference in your retirement outcome by increasing contributions 1 to 2 percent annually. Make these increases automatic if possible to streamline the process.
Use your age to your advantage. Retirement often takes a back seat to buying a home or raising a family in your 30s and 40s, but by your 50s, saving for your later years must take priority and is more important than putting your kids through college. “The airlines tell you in the loss of cabin pressure to place the mask over your mouth first, then look around to help others,” says George Villa, president of Villa Tax Advisory Group in Groveland, Illinois. You should be treating your retirement the same way. Unless you have a pension or a guaranteed stream of income, your own savings should come first because “no one is going to fund your retirement.”
Catch-up contributions let you close some of the savings gap if you’ve neglected your 401(k). Over time, the extra $6,000 that people age 50 and older are allowed in catch-up contributions adds up. Assuming you begin making catch-up contributions at age 50 and retire at 65, Barnash says a $500 per month investment earning a 5 percent return would grow to more than $133,000. That, along with the regular $18,000 contribution, could help you regain some lost ground.
Maxing out your 401(k) after age 50 may require re-evaluating your lifestyle. If you’re behind on saving, you may need to consider cutting expenses or getting a part-time job to supplement your income, Villa says.
Follow a tried-and-true recipe for investing successfully. Rebalancing ensures that your investments are aligned with your target asset allocation, and it’s a must if you’ve left your 401(k) largely on autopilot. Hutchinson says many plans offer an auto-rebalance feature that does the work for you. If your 401(k) doesn’t, then you should rebalance at least once per year.
The difficulty with choosing new investments in a 401(k) is that your options are limited by your employer’s preferences. Target-date funds, for example, are becoming an increasingly common selection. These funds adjust their asset allocation over time, based on the investor’s target retirement date. While that simplifies your choices, target-date funds are not ideal for every investor.
Nathan Fisher, managing director of 401(k) solutions for San Francisco-based Fisher Investments, says choosing new investments is like cooking a meal. You start with the right ingredients and then follow a tried-and-true recipe designed to achieve the results you need. When evaluating funds, savers should consider overall fund quality, performance and the track record of the fund manager.
Fees are another consideration. Fisher says that a typical 50-something paying 1 percent in investment fees annually may end up with $20,000 less at retirement, compared to investments with fees of 0.5 percent. As you’re considering fund options, pay close attention to the cost and compare that against performance, to determine if the expense is justified.
Weigh the pros and cons of converting to a Roth. If you’re getting back into the 401(k) groove, it’s important to make sure you’re optimizing it whenever possible. That includes tax planning.
Converting a traditional 401(k) to a Roth 401(k), for example, might make sense for some older investors. Nathan Boxx, director of retirement plan services at Fort Pitt Capital Group in Pittsburgh, says the decision comes down to whether you think your taxes will be greater now or in retirement. If you expect to be in a higher tax bracket later, converting could work in your favor.
There are, however, other factors to consider. “Assuming your plan allows for Roth conversions, you need to consider the amount that will be treated as ordinary income,” Boxx says. Crunching the numbers can give you an idea of how large a tax bill you might face so you can ensure you have the means to pay it beforehand.
While that might cause a temporary financial pinch, it could be worth it in the long run. “The benefit to converting is once you pay the taxes, you’ll never have to pay taxes on those dollars again,” Boxx says.