5 Ways to Maximize 401(k) Performance after 55
As you near retirement, it’s crucial you do what you can to maximize your 401(k) performance after age 55.
No matter how much you have saved or whether you plan on retiring at 62, 65, or later, now is the time to either catch up on or further increase your 401(k) retirement savings.
What you do in the next few years with your 401(k) may mean the difference between having enough to get by or having the retirement lifestyle you desire.
Keep reading for our top 5 ways to maximize your 401(k) performance after 55.
#1 Maximize Your 401(k) Contributions
The best way to maximize 401(k) performance after 55 is to make sure you contribute the maximum each year until retirement.
In 2019, the additional annual contribution limit for 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan will stay the same for employees age 50 or older–$6,000.
This means if you are 50 or older, the annual contribution limit this year is $25,000, all of which reduces your taxable income now.
And, if you are married and you’re both 50 or older, you and your spouse can save $50,000 each year for retirement.
If you are unable to save $25,000 for retirement each year, upping the current amount you’re contributing and stretching yourself a bit may make a big difference in your retirement lifestyle.
Let’s use Mary and Bob as an example.
Mary is 55 years young. She’s planning on retiring at 70 and currently has $100,000 in her 401(k). Mary finds a way to save the $25,000 maximum contribution limit this year and every year until she’s 70. Let’s say she earns 6% annual rate of return on her investments. At the end of 15 years, she’ll have $821,555 saved for retirement.
Bob is also 55, plans on retiring at 70, and also has $100,000 in his 401(k). Bob finds a way to bump up his current savings, but he only saves $15,000 this year and every year until he’s 70. With a 6% annual rate of return, he will have saved around $588,795 for retirement.
The above examples do not include annual employer contributions and profit sharing. If added, estimated ending balances and differences could be much greater.
Mary saved $821,555. Bob saved $588,795.
For many people, the difference of $223,760 may have a significant impact on their retirement lifestyle.
Take a moment to think about what you would you do with the extra money come retirement.
Would you finally take that trip to Greece or rest easier knowing you would be able to travel to visit your kids and grandkids more often?
Would the difference mean you aren’t just getting by, but can actually enjoy your retirement?
As Robert Shiller, Nobel Prize Winner and Yale University Economics Professor put it…
#2 Rebalance Your Account Quarterly
Another way to maximize 401(k) performance after 55 is to rebalance four times a year, or quarterly.
By rebalancing your retirement account, you may lower the risk of your account underperforming due to target date funds that may not capture stock market opportunities.
It seems like a simple solution, yet…
- Over 80% of 401(k) investors fail to rebalance.¹
- 92% have no idea what they’re paying in fees.²
- Only 9% have set up auto-rebalancing features where they’re available.³
Few people rebalance their 401(k) account, and even those who do fail to manage risk through proper asset allocation.
Unmanaged allocations may experience much larger losses in down markets and may miss the opportunity for growth during good markets.
Rebalancing only the percentages of current holdings does not consider current market and economic conditions.
Because a stock or mutual fund that you chose last year–or even last quarter–may or may not necessarily still be going in the right direction for you. This may happen due to changes in consumer sentiment, tax and trade policy, and other factors.
Not rebalancing may also result in more significant losses during bad markets.
With that in mind, properly allocating and rebalancing your retirement account–based on your specific objectives–can be extremely advantageous.
Watch the video below to see how to read a 401(k) statement.
#3 Avoid Target Date Funds
A majority of retirement account investments are in target date funds (e.g., 2020, 2030, or 2045 funds), also called lifestyle funds and retirement date funds.
The rationale is that it’s easier and simpler for the average investor because investment strategies are combined into one mutual fund that’s structured to automatically adjust account allocations as the investor moves through different life stages.
In theory, as you age toward your target retirement date, the funds shift toward more conservative investments to reduce risk and protect your money.
For many 401(k) investors, this sounds like a win-win.
Invest your money, and let it do its thing until retirement.
However, target date funds are actually riskier than many people perceive.
More and more experts claim target date funds don’t perform as well as average investors are led to believe.
Citing studies by institutional advisory firm Research Affiliates, Barron’s associate editor Randall W. Forsyth wrote in a February 2019 article, “They [the studies] show that the standard ‘glide path’ of target-date funds, which start heavily weighted in stocks and reallocate to bonds in later years, doesn’t produce the desired results.”⁴
According to Rob Arnott, chairman of the board of Research Affiliates…
“You now have a trillion-dollar industry based on ideas that were never tested.”⁵
In response to Arnott’s statement, MarketWatch wrote in February 2019, “A trillion dollars is an understatement. In the U.S. alone, target-date funds held $1.11 trillion in assets at the end of 2017 and were growing about 7% a year.”⁶
An article titled “The Global Financial Crisis and the Performance of Target-Date Funds in the United States” indicated that on average, target date funds (like 2030 or 2040 funds) invested 75% in stocks, generating average losses of over 30% during the 2008 financial crisis.
Investors planning to retire in 2010 suffered significant losses because 2010 target date funds increased their common equity exposure in 2007.⁷
Morningstar analyst Jeff Holt recently noted…
“In the long run, the biggest risk in target-date funds is that they won’t meet investor expectations for avoiding losses.”⁸
Target date funds are based on the date of retirement, but fail to take into consideration that not all investors are created equal.
If you’re younger and plan to retire in 2050, you’re told to select a 2050 fund. If you’re older and wanting to retire in 2030, you’d select a 2030 target date fund.
What this means is investors are grouped solely based on their expected retirement date–location, age, profession, salary, risk tolerance, goals, and objectives are not taken into consideration.
Investing in target date funds and not actively managing your retirement account is equivalent to saying there’s a one-size-fits-all investment strategy that works for everyone.
As Mark Sorensen, founder of 401(k) Maneuver states, “This doesn’t even pass the common sense test, does it?”
If you are currently in a target date fund, we suggest moving away from this option and better utilizing all the options available in your workplace retirement plan.
At the very least, quarterly rebalance your account.
Download our guide 5 Ways Target Date Funds Fail to Live Up to Their Promise.
#4 Being Too Cautious with Your 401(k) Investments
If you are 60 years old today, you’re often told to be conservative to avoid loss, whereas if you’re 25, you’re told to be more aggressive because you have more time to see better returns.
However, if you’re over 55 years old and close to retirement, being too conservative
with your investments may be a missed opportunity for you to catch up on retirement savings.
This advice is contrary to what many of us are told and can be very costly.
The truth is…
Time and consistency build wealth, if your 401(k) is managed properly.
If you invest consistently each pay period and if you rebalance your 401(k) each quarter, you’re likely to net more money when the market corrects itself.
Other advice often given to investors over 55 is to build up cash savings so, if the market takes a dip, they have cash on hand and can avoid tapping into their depleted investment portfolio.
The downside to cash is that most money market accounts pay little to no interest.
So, if you’re cash rich, you risk losing value due to inflation.
While it’s important to reallocate your investments per your tolerance to risk in your 60s, if you’re too cautious, you risk coming up short when you retire because you aren’t able to maximize growth.
#5 Speak to a Third-Party Expert ASAP
It’s not only important that you receive expert advice on how to grow your current nest egg, but it’s also vital you have help to protect what you have this close to retirement.
If you want to maximize 401(k) performance after 55, we recommend you speak with a third-party expert who can help you reallocate your investments per your tolerance to risk and time to retirement…
Not to mention, advise on Social Security and healthcare savings.
A recent Morningstar report shows that participants who received expert guidance had as much as 40% more income during retirement versus those who received no help at all.⁹
Even if you are a year or two away from retiring, it’s worth finding an advisor who can help guide you.
Check out our retirement calculator to see how much you may have at retirement and calculate how professional help may improve your future retirement income.
If you’d like more tips on how to have more income at retirement, download our guide on How to Supercharge Your 401(k) Performance Today.
Sources:
- “Over 90% of Americans make this 401(k) Mistake.” Mauri Backman, The Motley Fool.
- “Over 90% of Americans make this 401(k) Mistake.” Mauri Backman, The Motley Fool.
- http://aon.mediaroom.com/news-releases?item=136959
- MarketWatch, Opinion: Target-date funds are more expensive and less effective than this simple investment plan, February 20, 2019
- MarketWatch, Opinion: Target-date funds are more expensive and less effective than this simple investment plan, February 20, 2019
- MarketWatch, Opinion: Target-date funds are more expensive and less effective than this simple investment plan, February 20, 2019
- The Global Financial Crisis and the Performance of Target-Date Funds in the United States – October 1, 2011
- Special Report: Fidelity puts 6 million savers on risky path to retirement, Reuters.com March 5, 2018
- David Blanchet, Morningstar Analyst 2014, “The Impact of Expert Guidance on Participant Savings and Investment Behaviors”
