Put the "You" in Your Employer's Automatic Retirement Plan
Your employer automatically enrolled you in its retirement savings plan. Does that mean you'll automatically save enough for a comfortable retirement? Maybe, but for many the answer is no.
Automatic saving isn't
the same as putting things
Automatic features make saving simple—but automatic saving isn't the same as putting things on autopilot. It is ultimately up to you to save wisely and robustly enough to adequately fund your retirement.
These five tips will help you make the most of your company's automatic retirement savings features.
1. Know your defaults. Familiarize yourself with the default savings rate, automatic escalation rate (if your plan offers auto-increases) and the investment selection your company has chosen for you. The default investment will likely be a lifecycle fund, a balanced fund or a managed account—these are the types of investments that the federal government has approved as acceptable defaults in automatic 401(k) plans. Keep in mind that you always have the ability to change the defaults your employer has chosen. For example, the majority of employers use 3 percent as the default savings amount, but you may find that this rate is not robust enough to build a truly substantial retirement nest egg.
2.Take full advantage of an employer match. Most automatic plans set a default rate that ensures you receive the full match—but that isn't always the case. If the default savings rate does not result in you receiving the full match, then you may want to increase your savings rate, or else you will be leaving free money on the table.
3.Go up the savings escalator. If your plan offers automatic escalation, stick with it if you can—annual increases are a great and often painless way to increase your savings. If not, be disciplined and do it yourself. Remember that if you're not saving at least 10 percent of your salary, chances are you're apt to come up short when retirement rolls around.
4.Open and read your account statements. Your employer must give you an account statement at least once every quarter—and plan providers often send your statements on a monthly basis. You may also be able to access account information online. Make a habit of looking at your statements each time you get them, even in bear markets, and ask questions about anything you don't understand. You may also be able to access your account information online.
5.Don't opt out—or cash out. Significant tax advantages and often an employer match come with your plan—important benefits you lose if you don't stay in the plan. Even worse, if you opt out, you may not get back in for a while, which can put you way behind on your savings. If you leave your organization, resist the urge to cash out even a part of your savings for something you think you need. Otherwise, you might face tax penalties. Remember: retirement savings is just that—for your retirement.
Regardless of the type of retirement savings account you have, keep in mind that investing nearly always means taking the risk that you could lose some, or even all, of your principal. In a retirement savings plan, principal is the amount that's contributed from your salary, and the amount on which earnings accumulate. But not every investment carries the same level—or even the same type—of risk, so make sure you understand the nature of your investment. A good way to do this is to read each prospectus of the funds in which you invest, which contains risk-related information, as well as the quarterly reports you receive.
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