As the weather turns cooler and leaves begin to fall, workers often have a few weeks to revisit their choices in employee benefit plans. The annual open enrollment period typically occurs in October or November and raises important questions regarding next year’s benefits, including decisions about retirement contributions.
This year, take the opportunity to give your retirement savings strategy a tune-up while you’re sorting through open enrollment options. Individual needs will vary, but by focusing on these questions you’ll be able to choose actions that help build a sound financial future for yourself and your family.
1. How much should I contribute to a retirement savings plan?
The short answer has two components: a) at least enough to capture the full amount of any employer matching contributions and b) as much as possible without risking insufficient cashflow. Cashflow is a key consideration here, since you won’t be able to access the funds you contribute without incurring a penalty until you reach the age of 59 ½. With that in mind, don’t contribute money you may reasonably expect to need in the shorter term for general living expenses, emergency funds or specific goals like buying a house. Beyond that, it’s usually a smart move to maximize your contributions up to the limits of the specific plan. Remember to factor in any expected raises or bonuses when calculating how much you can afford to save next year.
2. Should I have an IRA in addition to my employer’s plan?
Once you’ve maxed out the amount you can stash away in your employer-sponsored retirement savings plan, including catch-up contributions for workers 50 or older, consider adding to a new or existing individual retirement account. IRAs aren’t tied to a job and you can contribute even if you participate in an employer’s plan, although higher earners lose some or all of the tax deduction for these contributions. If there’s room in the budget, think about taking the opportunity to increase your savings this way.
3. What abut Roth accounts?
Roth accounts, whether 401(k), 403(b) or IRA, represent an incredible opportunity for tax-free retirement income from contributions plus accrued interest, dividends and market gains. The catch is that your contributions don’t reduce current taxable income, so the decision to utilize a Roth account requires an educated guess about future income. If you expect to be in a lower tax bracket in retirement than you are now, then Roth contributions may not be your best option. If projected income (after any deductions) is likely to be higher in the years ahead, you might want to forego the tax deduction now in favor of tax-free income later.
4. How should I invest my retirement savings?
Open enrollment is a perfect time to review your portfolio allocation. Ensure that your investments represent several asset classes that are well-diversified and weighted appropriately for your age and risk tolerance. Employer-sponsored savings plans often include a range of target funds based on investment horizons that reflect specific retirement dates. If you’re uncomfortable selecting individual investments, these funds can be a good way to tailor investments to your projected retirement date.
5. Do I need to change or update account beneficiaries?
Keeping beneficiary information updated is a crucial element in creating the financial legacy you want. If you’ve gotten married, strongly consider naming your spouse as primary beneficiary (significant tax advantages on inherited retirement funds are only available to spouses). If you’ve gotten divorced you probably don’t want to give your ex-spouse a nice windfall, but that’s exactly what will happen unless you take action. Beneficiary designations on insurance policies, investments and retirement accounts supersede conflicting information that may exist elsewhere, like a will or estate plan. With this in mind, it’s important to review your selections at least annually and with every life change (births, deaths, marriages and divorces, among other events).
Open enrollment represents a chance to review and revise your retirement and estate planning decisions. Don’t let it pass without thinking about what’s possible, what’s desirable and what’s changed in your life and family since last year. If you have questions, reach out to the financial professionals at HBP; we’ll help you find answers that keep you moving toward your goals.