September 25, 2014 by Bill Johnson
Saving for retirement doesn’t happen in one fell swoop.
It usually starts with baby steps: First you might enroll in a 401(k) or set up an IRA. Next it’s time to take advantage of any employer match available to you. And then you should seriously think about increasing your contributions periodically.
If you’ve taken some of these steps, congratulations — you’re ahead of the curve!
According to a recent Bankrate survey, nearly 40 percent of Americans haven’t even started saving for retirement. And the numbers don’t get much more encouraging with age: More than a quarter of those ages 50 to 64 admit to the fact that they don’t have a nest egg.
But starting to save is half the battle — there are other steps to consider taking to help maximize your retirement strategy and make every penny count.
That’s why we’ve rounded up six small, retirement-focused moves you can do today that could help build your nest egg savings down the line. Translation: Not only might these ideas help you save more, but they may also help you save smarter.
Small move #1: Seek out low expense ratios
An expense ratio is a fancy name for the fee you pay when you invest in a mutual fund or ETF. It’s essentially the percentage of assets that a fund charges to cover its administrative and management costs.
And the more “actively” your account is managed — i.e., there is a person or team who is making trades to potentially boost your return — the higher that percentage tends to be. If your account is “passively” managed, meaning that it’s likely mirroring an index, like the S&P 500, it won’t usually require active trading. Therefore, your fee will likely be lower.
Expense ratios are seemingly small — they typically range anywhere from less than 1 percent to 2 percent — but they can have an impact on your investments in the long run.
Say you’ve invested $10,000 in a fund that has a 6 percent annual return and an expense ratio of 1.5 percent. In 25 years, that fee has cost you $13,339 in returns. By contrast, if that account had an expense ratio of 0.5 percent instead, that number goes down to $5,031. (Check out this Vanguard graphic for more on how expense ratios could affect your returns.)
The bottom line: “[Your expense ratio] should be below 1 percent. If it’s above that, consider looking at competitors to find a better deal,” says David Blaylock, CFP® with LearnVest Planning Services. “There are probably lower-cost alternatives that achieve the same investment objectives.”
If you’re not sure what your expense ratio is, call your provider to double check or read through your prospectus, which should have the details. Many companies make it hard to find, but legally, they must share their fee information.
And if you have a 401(k), switching providers may be harder because you’re limited to who your company uses. But you can at least talk to your human resources department about the possibility of finding one that offers lower-fee funds.
Small move #2: Look into auto-escalating your retirement savings
Many experienced savers already take a “path of least resistance” approach to their retirement contributions by having a set percentage of their salary deducted from their paychecks and diverted to a 401(k).
This type of automation helps keep you from spending your retirement money, but it still leaves the job of increasing your savings up to you — a task that often falls to the priority wayside.
Luckily, “plans are beginning to add an auto-escalation feature, which can even coincide with your employer’s review cycle,” says Peter Macaluso, vice president of FM International, a retirement services company. “So when you’re due for a raise of 2 percent to 4 percent, you can auto-escalate your 401(k) deferrals by 1 percent or so at the same time. It’s a way to save more without feeling it in your pocket.” In fact, one study found that auto-escalation alone helped boost savings for some workers by up to 28 percent.
If your company doesn’t offer an auto-escalation feature, or if you contribute to an IRA instead of a 401(k), consider setting a periodic calendar alert (once every six months might be a good frequency) to remind yourself to review your contributions and see how much you can afford to boost your contributions.
Small move #3: Roll over old retirement accounts
Whenever you start a new job, you’re likely also enrolling in a new 401(k) plan. And, for many people, that often means juggling two, three, four, or more accounts at any given time.
Keeping separate 401(k) accounts can be annoying for two reasons. First, from an organizational standpoint, you have multiple sets of paperwork, online passwords, and account balances to track. There’s also the fact that leaving your money in an old 401(k) means that you may not be in the loop on changes that a previous employer may have made to a plan since you left the company.
Second, if you keep separate accounts, you’re also paying separate fees. You’re being charged administrative fees for each account on top of the aforementioned expense ratios — costs that can eat into your returns. “Even if [your administrative fees] are just $30 or $40 per year, that’s still something,” Blaylock says. “Plus, you can monitor your investments more closely if they are consolidated in one place.”
So consider saving yourself some trouble by rolling everything into a single 401(k) account. Just be sure to do your homework on whether it’s better for you to roll over your old 401(k)s into your current one, or roll old balances into a single IRA — because a recent government report revealed that plan providers aren’t always up front about all of the options best suited for you.