If you work for a medium-to-large company, you may now be entering the “open enrollment” period — that time of year when you get to make changes to your employee benefits. Your benefit package can be a big piece of your overall financial picture, so you’ll want to make the right moves — especially in regard to your employer-sponsored retirement plan.
Take a close look at your 401(k) or similar plan, such as a 403(b), if you work for a school or a nonprofit group, or a 457(b), if you work for a state or local government. And keep these possible moves in mind:
Boost your contributions. If your salary has gone up over the past year, or if you just think you have a reasonable “cushion” in your disposable income, boost your contributions to your employer-sponsored retirement plan. Even if you can’t afford to contribute the maximum amount — which, in 2014, is $17,500, or $23,000 if you’re 50 or older — to your 401(k) or similar plan, try to put in as much as you can afford. Remember the key benefits of these plans: Your money can grow tax deferred and your contributions can lower your annual taxable income. (Keep in mind, though, that you will eventually be taxed on your withdrawals, and any withdrawals you take before you reach 59½ may be subject to a 10% IRS penalty.)
Don’t miss the match. Try to take full advantage of your employer’s matching contribution, if one is offered. Your employer may match 50% of employee contributions, up to the first 6 percent of your salary. So if you’re only deferring 3 percent of your income, you are missing half the match — or leaving money “on the table,” so to speak.
Rebalance, if necessary. You may be able to change the investment mix of your employer-sponsored retirement plan throughout the year, but you might find that the best time to review your holdings and rebalance your portfolio is during open enrollment, when you’re reviewing all your benefit options. Try to determine if your investment allocation is still appropriate for your needs or if you own some investments that are chronically underperforming. And always keep in mind the need to diversify. Try to spread your money around a variety of investments within your plan, with the exact percentages of each investment depending on your goals, risk tolerance and time horizon. As you near retirement, you may need to lower your overall risk level, but even at this stage of your career, you’ll benefit from a diversified portfolio. While diversification can’t guarantee a profit or Review your beneficiary designations. Your retirement plan’s beneficiary designations are important and, in fact, can even supersede the wishes you express in your will. So if you experience changes in your life — marriage, remarriage, a birth or an adoption, etc. — you’ll need to update the beneficiary designations on your 401(k) or similar plan. It won’t take much time today — and it can help prevent a lot of trouble tomorrow.
You work hard for the money that goes into your retirement plan —so make sure your plan is working hard for you.
Doug Drost is a certified financial planner for Edward Jones, 2262 Reno Highway.