I found this article in the Employee Benefits Newsletter. The author gives great suggestions but assumes the most important one - automatic savings. It makes no difference what we are saving for as long as we have a goal and put it on automatic pilot. Then we no longer have to think about it and definitely eliminates the guilt if we lose track or forget.
1. Contribute as much as you can.
Remember, we all need to average at least 13% in contributions to our 401(k) accounts each year if we are to retire without reducing our standard of living. Since most of us don't contribute anything close to that amount, advise participants to consider increasing their contribution rates by at least 1% every time they get a raise. Increasing contributions gradually when participants experience a salary increase minimizes the impact of additional 401(k) contributions on take home pay.
2. Grab all of that free money.
Most 401(k) plans have a company matching contribution and, believe it or not, most participants don’t contribute the amount necessary to receive the maximum employer match. As a result, they leave free money on the table. Quick, what is the best performing investment in any 401(k) plan? Of course, employee contributions that result in a company match! In most plans the company match is dollar for dollar up to a certain percentage — resulting in a 100% immediate return on investment.
3. Consider target date funds.
Most participants are too busy to manage their 401(k) accounts properly. As a result, many only look at them in times of stress (think crashing markets). The decisions some make at those points aren’t necessarily helpful in achieving a comfortable retirement. The experts believe 75% of all plan participants should invest 100% of their account balances in target date funds. Professional management can help participants avoid making bad decisions in times of stress.
4. Set goals.
Not enough of us do this. It’s hard to discipline ourselves to save when what we are saving for is ambiguous. It is easier for participants to set meaningful savings goals if they know whether they are going to travel, relocate to a warmer climate or continue to work in retirement. Even if their retirement turns out completely different from what they had planned, having goals now makes the future seem more concrete.
5. Don't take withdraws or borrow.
Plan loans are one of the worst investments participants can make. Amounts borrowed are double-taxed and the rate of return on borrowed funds (a loan is one of the investments in a borrower's account) is equal to the interest rate on the loan. Remember the S&P 500 returned nearly 32% in 2013! Withdrawals permanently remove assets from participant retirement accounts.
