Automated investing can help remove the emotion around buy and sell decisions. While you may not have implemented automatic investing in your after-tax brokerage account, you most assuredly donate the same amount to your retirement plan at regular intervals. You take advantage of dollar-cost-averaging and aren’t as tempted to sell when the markets go down.
Yet one issue with automatic investing is its very name – it’s automatic, on autopilot. While set and forget may lead you to a comfortable retirement, set and regularly review might get you there faster or with more money.
How has your life changed?
Before you look into your specific retirement plan, take a minute to consider your life over the past year. We’ve all experienced inflation seemingly every time we buy something. But what specifically has impacted your finances? Have you received a raise, or even changed jobs where you are making significantly more? Were you recently forced to purchase a car during the height of crazy car prices? Did you add a child to your family or start taking care of one of your parents?
Even if it’s not a life-changing event, smaller issues can impact your ability to save. How’s your credit card debt? With inflation, have you allowed your card balances to creep up just as interest rates are also rising? With the increase in home values across the country, did you receive a surprise tax bill at the end of the year?
Take a few minutes to evaluate if you’re doing better or worse than last year. Is this a significant change to your income? By understanding where you are and whether these trends are likely to continue into the new year, you can confidently make any changes needed in your retirement plan.
How much are you saving for retirement?
The savings rate you chose when you were just starting out in your 20s probably shouldn’t be the same as what you’re contributing today. Definitely save enough to receive any match offered by your employer; this is essentially free money just for participating. Then consider if your current savings will help build the retirement fund you’ll need. You can depend on financial experts who recommend you save anywhere from 10-20% of your paycheck. Or you can complete an online calculator that will let you estimate how much you might have at retirement with different contribution rates.
Are you still comfortable with your asset mix?
I’m a big believer in investing a substantial portion of your retirement savings in the stock market. However, I have lived through several market corrections and don’t sell when times are bad. Someone once wrote that it’s easy to be a risk-taker in rising markets. How are you doing with the current market climate?
One advantage to participating in a retirement plan is that you can buy and sell with no tax consequences. If you find that you have too much in stocks and somehow they are still in the money, you can sell a portion of them and purchase less risky alternatives. Similarly, if you find that you have some extra cash on the sideline, you can invest this cash directly in less risky investments and lower your percentage of stocks that way.
Have your fund options changed?
I worked in the fund industry, specifically providing communications regarding retirement plans such as 401(k)s and 403(b)s. We often commiserated that we would seem to be screaming from the mountaintops about plan changes but no one was listening. Yet it’s easy to miss a letter or email about your plan, or even to see it and think l’ll deal with this later. During your review, make sure the funds you are invested in are the funds you chose. Plans will change their fund options, usually replacing them with a similar fund. But if you aren’t happy with the change, or find that your plan has added new funds that work better for you, make the switch.
General maintenance
In addition to the large-scale decisions listed above, regular retirement plan reviews give you the opportunity to check under the hood:
Fees. Fees for mutual funds and exchange traded funds seem to be on a downward trend. Make sure you aren’t overpaying for your fund options.
Account access. I once logged into my online brokerage and found that I had to call them to regain full access to the account. While this shouldn’t be a huge deal, you want to have access to the plan when you need it.
Your performance. How did your funds do? Many people invest in index funds so their returns should closely mirror the index on which the fund is based. If you’re using other funds, did you achieve the returns you were hoping for – and the returns you will need for a comfortable retirement?
IRS limits
While this doesn’t pertain only to your plan, the IRS often changes the maximum amount someone can contribute to retirement plans and IRAs alike. For instance, the total someone can contribute to a 401(k) plan in 2023 is $22,500. If you are age 50 or older, you can add on a catch-up contribution of $7,500, totaling $30,000. If you want to contribute the maximum allowed and don’t realize the limit changed, you may end up short-changing your retirement.
Your retirement plan is a great place to save, and being able to contribute automatically through payroll deductions makes it easy. Checking in every six months or even annually can help you stay on track for the retirement you deserve.
Photo by Bich Tran