Boosting Retirement Dollars

The turmoil in the stock market recently unnerved many investors. But there’s still many ways to enhance your 401(k) plan or other retirement account, even if the market is heading south. Here are 10 suggestions:

1. Max out your 401(k) contributions. Don’t leave money on the table. In 2015, employees can contribute up to $18,000 to their 401(k) plan. Often an employer will match 50% of an employee’s contribution up to 6% of their compensation. Some match 100% of an employee’s contribution up to a certain limit. What’s more, your contributions are tax-deferred.

2. Consider a Roth 401(k) if available. Unlike a traditional 401(k), contributions to a Roth plan are taxable. The big benefit: All withdrawals are tax free when you retire. That includes all the gains your 401(k) portfolio earned. This can be beneficial if you’re in a high tax bracket—or expect to be–at the time of retirement.

3. Individual retirement accounts (IRAs) may be preferred at times. Not all 401(k) plans are created equal. Many teachers I work with have no employer match, and their plans are expensive with poor investment choices. They’re better off funding their own IRA. You can select a Roth or traditional IRA, which offer the same tax features as their 401(k) counterparts. The annual contribution limit for both is $5,500.

4. Don’t forget spousal IRAs. Generally, you need earned income to open an IRA. But an employed spouse can make IRA contributions on behalf of a non-working spouse. This is a useful benefit for someone who has left the workforce to raise a family. The contribution limit is the same: $5,500 a year.

5. Select lower cost index mutual funds. Index fund managers buy and hold a basket of equities in proportion to their weighting in a predetermined index. For example, there are many mutual funds that mirror the movement of the Standard & Poor’s 500 stock index. By contrast, actively managed portfolios are more expensive because they routinely buy and sell individual stocks.

Fidelity Magellan (FMAGX), perhaps the best-known actively managed fund, has an annual expense ratio of 0.7% of assets, according to research firm Morningstar. By contrast, Vanguard 500 Index (VFINX), which tracks the S&P 500 stock index, charges only 0.17%.

6. Target date funds (TDFs) can be useful. If you’re like many investors who don’t pay attention to their retirement accounts, a target date fund is a good option. Most well-known fund families offer these portfolios, which are also known as lifecycle or age-based funds. They are usually named for the year you intend to retire, such as the “2025 Retirement Fund.” Comprised of a basket of underlying funds that invest in stocks, bonds and cash equivalents, these funds automatically rebalance and become more conservative as you approach your retirement date.  

But do your research when selecting a target date fund. None take into account your own risk tolerance, and their asset mixes can vary widely as you approach retirement. What’s more, the firms that sponsor these target date products often invest the assets in their own house-brand funds that can be inferior to other choices.

7. Minimize holdings of your company’s stock.  Many 401(k) plans offer company stock as an option. But risk grows the more you concentrate your portfolio in a single stock. Just because your company is doing well now, doesn’t mean it won’t suffer setbacks later. Remember Enron.

8. Don’t panic when the stock market stumbles. Markets fluctuate, but you have to keep investing. Consider dollar-cost-averaging. You can invest a fixed dollar amount at regular intervals over a specified period. This allows you to buy more shares when market prices dip and fewer shares when prices rise. Your return will be higher than individuals who try to time the market.

9. Asset allocation can limit your tax liability.  If you have a taxable portfolio, consider investments that are subject to lower capital gains tax, such as Exchange Traded Funds (ETFs).  These investments hold down capital gains tax because they minimize buying and selling stocks. Similarly, tax-advantaged mutual funds, such as index funds, offer similar benefits. Tax-exempt municipal bonds are another option.

10. Consider a qualified longevity annuity contract (QLAC).  You’re allowed to use up to 25% of your retirement account to fund a QLAC, up to a maximum of $125,000. A QLAC is a deferred fixed annuity, usually offered by an insurance company that pays a monthly lifetime income after you retire.

It’s exempt from required minimum distributions (RMDs), which are mandatory withdrawals at age 70½, and you pay tax only when you decide to receive payouts. The longer you wait to begin payouts, the more you’ll receive.  Having this type of annuity can help reduce the risk of outliving your assets.

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Eve Kaplan, CFP, is a fee-only advisor in Berkeley Heights, N.J. Kaplan Financial Advisors is a Registered Investment Advisor in New Jersey and New York.

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