Target date funds: Is your TDF working for you?

When it comes to investment products, target date funds (TDFs) can seem like the simple and safe “set it and forget it” option. For some that may be true, but if used incorrectly, they can work against you.

Sometimes called “life cycle funds,” a TDF is a fund that holds a mix of stock, bonds, and other investments. They are designed to be long-term investments for a future target retirement date.

Anybody can invest in a TDF, but they are generally most effective for younger investors and those who have less complex financial needs.

Generally speaking, the farther away a TDF is from its target date, the higher the ratio of stocks it holds. And as it gets closer to its target date, the fund automatically shifts more towards bonds.

Our research shows us that people who eventually decide to move away from TDFs are looking to:1

  • Diversify their investments
  • Personalize their portfolios
  • Get investment help from an advisor

Most people who have TDFs allocate money into additional funds to try to achieve greater diversification or more personalized risk levels. But remember, a TDF is already diversified, and using one for only part of your retirement assets can result in lower returns. 

Talk to an Advisor

Our advisors are happy to speak with you to make sure your TDF is working for you and to answer other questions you may have. We can help:

  • Evaluate and make recommendations on the investments in your plan
  • Help you think about how much to save
  • Look ahead at your retirement goals to see if you’re on track

 

1 Not so simple: Why target-date funds are widely misused by retirement investors, March 2016. Available at https://financialengines.com/~/media/files/financial-engines-tdf-report-022916.pdf
2 Aon Hewitt and Financial Engines joint research, Help in Defined Contribution Plans: 2006 Through 2012, May 2014. To show the returns impact, the potential outcomes were compared of a participant fully invested in a target date fund versus a participant partially invested in a target date fund after 20 years, where each invests a lump sum of $10,000 at age 45. For a complete copy of the research study at https://financialengines.com/~/media/files/financial-engines-tdf-report-022916.pdf

5 ways to kick your retirement savings up a notch.

Ever get the feeling you’re not saving enough to meet your retirement income needs? You’re not alone. The Employee Benefit Research Institute’s 2018 Retirement Confidence Survey found that only half of workers are confident they know how much income they’ll need in retirement, and just one in eight is very confident.1

So how much should you be saving in your retirement accounts?

There’s no one-size-fits-all answer and there’s a lot to think about. For example:

  • How much you’ve already saved.
  • How many years before you’ll need your savings.
  • Your income before retirement.
  • Your income goals in retirement.
  • How much risk you can tolerate in your retirement portfolio.

But the short answer for most people is this: Save as much as you can.

Here are five money-management tips that can give you a better chance of hitting a realistic retirement savings target.

Ramp up contributions.

Increasing retirement plan contributions — even 1% a year — can help get you into double-digit savings territory before you know it. If your employer’s plan offers matching contributions, start by saving to the match. Adding 1% a year to your savings rate after that can help you get to a healthy savings rate. The year that you turn 50, you can ramp up even faster by making catch-up contributions.

Redirect extra income.

Put a percentage of every salary raise, bonus, tax refund, and monetary gift or prize into your retirement plan.

Spend less.

Create a household budget to track where your money is going. Cut out unnecessary expenses, like a gym membership you don’t use, and move the found money into savings. A budget can also help you reduce your debt. Carrying balances on high-interest credit cards eats into your monthly income. Pay down those cards or consider consolidating several debts into one lower-interest loan. Once you pay off a credit card or loan, keep making those payments — but direct them to your retirement plan instead.

Negotiate expenses.

A phone call to customer service can often lower service contracts like cable TV or annual fees and interest rates on credit cards. You can usually reduce insurance premiums by consolidating insurance policies such as auto and home with one company.

Pay the doctor with pre-tax dollars.

Does your employer offer a Flexible Spending Account (FSA) or Health Savings Account (HSA)? You may be able to direct pre-tax dollars to help pay for qualified medical expenses like co-payments and prescriptions. Just make sure you plan your yearly expenses carefully because in some cases, any unspent money in these accounts at the end of the year may not roll over into the next year.

Make a commitment to save.

Once you make saving for retirement a priority, you can approach these tactics almost like a game. You may have to make a few sacrifices, but several small changes in how you manage your money now can help you reach your savings goals later.

 

1 Greenwald, L., Copeland, C. and VanDerhei, J. (24 April 2018). The 2018 Retirement Confidence Survey. Employee Benefit Research Institute Issue Brief, no. 431.  Retrieved Sept. 6, 2018, from https://www.ebri.org/pdf/surveys/rcs/2018/2018RCS_Report_V5MGAchecked.pdf
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Market summary: August 2018.

Records and regrets: U.S. stocks reach new highs while international stocks retreat.

August was another record-setting month for stocks here at home, as domestic equity returns hit new highs. It was a different story overseas, however, as international equity markets were somewhat unsettled by economic news abroad. On the fixed-equity front, bond markets were noticeably calmer last month.

What happened.

Equity markets diverged sharply in August. Domestic equities produced strong returns, hitting new highs. Large-cap stocks, represented by the S&P 500, climbed +3.26% for the month. Small-cap stocks (represented by the S&P 600) did even better, rising +4.83%.

While domestic stocks were climbing, the international equity markets slipped. Developed-market stocks (MSCI EAFE Index) fell 1.93% in August and emerging markets struggled, with the MSCI Emerging Markets Index dropping 2.70%.

Bond markets were noticeably calmer in August. The yield on 10-year Treasury bonds declined from 2.96% at the beginning of the month to 2.84% at month-end. That helped the Bloomberg Barclays Aggregate Bond Index rise +0.64%.

Events in August.

Domestically, strong U.S. equity returns reflected positive economic news that included the recent sky-high valuations of Apple and Amazon (see sidebar). U.S. GDP (gross domestic product) growth for the second quarter was revised upward to 4.2%, the fastest pace since 2014. The unemployment rate ticked down to just 3.9%. And corporate earnings continued their strong showing. Per FactSet, a financial data company, 79% of companies reported a positive earnings surprise in the second quarter.

Disappointing international equity markets reflected less-positive economic news overseas in August. Markets in Asia and Europe were unsettled because of speculation that the U.S. was considering raising tariffs from 10% to 25% on select Chinese goods. Overseas markets were further unsettled by volatility in emerging-market currencies. The Turkish lira fell significantly against the U.S. dollar after calls to double tariffs on Turkish steel and aluminum mid-month. Argentina’s currency suffered a similar dip, and its central bank raised interest rates by +15% to an eye-watering 60%.

Unsurprisingly, such economic news brought uncommon volatility to emerging-market equities. In August, over a third of trading days produced swings up or down of greater than 1%.

What it means for you.

Most personalized Financial Engines portfolios are weighted slightly more to domestic stocks than to international. This, along with our allocation to bonds, means your portfolio will likely have been up a fraction over the month.

But the troubled international markets of August serve as a reminder that all investing comes with risk. And risk is personal. Because we build your portfolio specifically for you, the more you tell us about yourself — your goals, other retirement assets, and how comfortable you are with risk — the better we can tailor your investments to your unique situation. Please log into your Financial Engines account or call one of our advisors to make sure we have the information we need.

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©2018 Financial Engines. All rights reserved. This publication is for informational purposes only and does not constitute investment advice or an offer to buy or sell any security. Future market movements may differ significantly from the expectations expressed herein, and past performance is no guarantee of future results. Financial Engines assumes no liability in connection with the use of the information and makes no warranties as to accuracy or completeness. Future results are not guaranteed by any party. Financial Engines® is a trademark of Financial Engines, LLC. Bloomberg Index Services Limited. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). BARCLAYS® is a trademark and service mark of Barclays Bank Plc (collectively with its affiliates, “Barclays”), used under license. Bloomberg or Bloomberg’s licensors, including Barclays, own all proprietary rights in the Bloomberg Barclays Indices. Neither Bloomberg nor Barclays approves or endorses this material, or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith. All other intellectual property belongs to their respective owners. Index data other than Bloomberg is derived from information provided by Standard and Poor’s and MSCI. The S&P 500 index and the S&P SmallCap 600 Index are proprietary to and are calculated, distributed and marketed by S&P Opco, LLC (a subsidiary of S&P Dow Jones Indices LLC), its affiliates and/or its licensors and has been licensed for use. S&P®, S&P 500® and S&P SmallCap 600®, among other famous marks, are registered trademarks of Standard & Poor’s Financial Services LLC, and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC. ©2018 S&P Dow Jones Indices LLC, its affiliates and/or its licensors. The MSCI information may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be used to create any financial instruments or products or any indices. The MSCI information is provided on an “as is” basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively, the “MSCI Parties”) expressly disclaims all warranties (including, without limitation, any warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages.

Market summary: July 2018.

Stocks rise against backdrop of trade worries.

Both domestic and international stocks climbed in July, with U.S. large caps leading the pack. Market volatility was light, apart from Facebook’s big drop. Although tariff threats were still being lobbed back and forth — with some tariffs already in place — economic news was pretty good, too.

What happened.

July was a positive month for stocks both in the U.S. and abroad. U.S. large-cap stocks led the way, with the S&P 500 up +3.72% for the month. Small caps were hot on their heels, closing up +3.16%. International stocks rose, too. Developed-market stocks returned +2.46% and emerging markets +2.20% (MSCI EAFE and Emerging Markets indices).

On the volatility front, it was a fairly smooth ride for stocks: The S&P 500 didn’t move up or down by more than 1% on any single day in July.

Government bonds were almost unchanged for the month, up +0.02%. Corporate bonds (which are issued by companies to raise funds), however, rose +0.72% as it became slightly cheaper for companies to borrow (Bloomberg Barclays US Aggregate and Bloomberg Barclays US Credit indices).

Events in July.

Economic news was largely positive during July. Second-quarter growth came in at +4.1%, a level not seen in four years. Jobs growth also was strong, despite an uptick in the unemployment rate. Interest rates rose slightly over the month, and the dollar was almost unchanged against a basket of foreign currencies.

This came against the backdrop of tariff threats flying back and forth across the world — especially between the U.S. and China. And some tariffs have been put into effect. For example, the U.S. has levied a tariff of more than 20% on newsprint coming from Canada and a 25% tariff on steel from most countries. The European Union has imposed tariffs of 25% on certain goods coming from the U.S. Not to be outdone, China placed tariffs of 25% on $34 billion of U.S. goods.

Trade tensions appeared to ease late in July, however, following a positive meeting between President Trump and the president of the European Commission, Jean-Claude Juncker.

Facebook grabbed headlines late in the month, falling 19% in one day. In this month’s sidebar we look at why it happened and the lessons it can teach us about the importance of a well-diversified portfolio.

What it means for you.

Your portfolio will probably be up for the month, as all major asset classes rose in July. Stocks returned more than bonds, which means the higher your percentage of stocks, the better your portfolio will have done. Remember that stocks are riskier than bonds, however. That’s why the further you are from retirement, the more risk your portfolio will likely take.

Because we build your portfolio specifically for you, the more you tell us about yourself — your goals, other retirement assets, and how comfortable you are with risk — the better we can tailor your investments to your unique situation. Please log into your Financial Engines account or call one of our advisors to make sure we have the information we need.

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©2018 Financial Engines. All rights reserved. This publication is for informational purposes only and does not constitute investment advice or an offer to buy or sell any security. Future market movements may differ significantly from the expectations expressed herein, and past performance is no guarantee of future results. Financial Engines assumes no liability in connection with the use of the information and makes no warranties as to accuracy or completeness. Future results are not guaranteed by any party. Financial Engines® is a trademark of Financial Engines, LLC. Bloomberg Index Services Limited. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). BARCLAYS® is a trademark and service mark of Barclays Bank Plc (collectively with its affiliates, “Barclays”), used under license. Bloomberg or Bloomberg’s licensors, including Barclays, own all proprietary rights in the Bloomberg Barclays Indices. Neither Bloomberg nor Barclays approves or endorses this material, or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith. All other intellectual property belongs to their respective owners. Index data other than Bloomberg is derived from information provided by Standard and Poor’s and MSCI. The S&P 500 index and the S&P SmallCap 600 Index are proprietary to and are calculated, distributed and marketed by S&P Opco, LLC (a subsidiary of S&P Dow Jones Indices LLC), its affiliates and/or its licensors and has been licensed for use. S&P®, S&P 500® and S&P SmallCap 600®, among other famous marks, are registered trademarks of Standard & Poor’s Financial Services LLC, and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC. ©2018 S&P Dow Jones Indices LLC, its affiliates and/or its licensors. The MSCI information may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be used to create any financial instruments or products or any indices. The MSCI information is provided on an “as is” basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively, the “MSCI Parties”) expressly disclaims all warranties (including, without limitation, any warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages.

Playing catch-up on retirement savings.

For many of us, the early decades of adulthood go by in a blur. Life after college is filled with fun times and friends, then you might have gotten married and had kids – and after that, between working and raising a family, it seems like you’re suddenly 50 years old and haven’t dedicated as much attention and money to your upcoming retirement as you would have liked. Sound familiar?

If so, you’re not alone.

A poll conducted by Bankrate revealed that more than 25% of survey respondents between the age of 50 and 64 said they had not started saving for retirement.

What’s more, another study by the Employee Benefit Research Institute showed that 28% of Americans have less than $1,000 in savings that could be used toward retirement.1 Uncertainty about your financial future is definitely a cause for concern, but there’s no need to hit the panic button just yet – there are ways you can catch up on your retirement savings.

First, focus on saving as much as you can and start right away.

Contributing the maximum amount to your retirement accounts is an easy place to begin – currently, the annual limit in 2018 for a 401(k) is $18,500 plus $6,000 in catch-up contributions if you’re 50 or older. You may also be able to set aside another $6,500 ($5,500 plus a $1,000 catch up) in a traditional or Roth IRA. These accounts can bolster your portfolio, especially if your employer has a 401(k) match program.

Another tactic is to plan on working longer.

In addition to having more time to earn income and investment returns on new and existing savings, working extra years may help you enjoy a greater Social Security benefit down the road. Each year you postpone taking benefits between the age of 62 and 70, your eventual benefit increases by about 8%.2 This combination of extra years earning income, increased savings and greater Social Security benefits can help to make a major difference in the amount of retirement savings you accumulate.

Finally, think creatively about how to reduce expenses and earn extra income – and this doesn’t mean selling your kidney on the black market or anything else sketchy.

In this new “gig economy,” there are plenty of opportunities to find supplemental work as a consultant or freelancer and the extra money earned from these jobs can add up faster than you might think. In addition, consider your housing situation – mortgage and general upkeep costs typically make up a significant portion of a person’s overall expenses so figuring out a way to reduce them can free up money that may help contribute to your retirement savings. If you have a good amount of equity in your home, it might make sense to downsize to someplace smaller. The four-bedroom house you raised your family in may not be the best fit anymore after your kids have flown the nest.

As you think through these strategies, consulting with an advisor can also be helpful. These professionals work with people in your situation every day and can help provide valuable insight into how to get from where you are now to where you want to be.

Catching up on your retirement savings may feel like an overwhelming project, but by turning your attention to it immediately and staying committed to it, you can help improve the chances that your golden years could be more enjoyable, not worrisome.

 

1 Brecht, K. (16 Dec. 2015). 9 Tips for Investors Getting a Late Start on Retirement Savings. U.S. News & World Report. Retrieved April 26, 2017, from http://money.usnews.com/money/personal-finance/mutual-funds/articles/2015-12-16/9-tips-for-investors-getting-a-late-start-on-retirement-savings
2 Campbell, T. (8 April, 2017). Is It Smarter to Claim Social Security at 62 or 70? Fox Business. Retrieved April 26, 2017, from http://www.foxbusiness.com/markets/2017/04/08/is-it-smarter-to-claim-social-security-at-62-or-70.html
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Market summary: June 2018.

Trade threats rattle markets.

Here’s a look at what happened in the markets and economy during June, why it happened, and what it may mean for you.

What happened.

At home, markets were up in June. Small caps, measured by the S&P 600, rose by +1.13%, and large caps gained +0.62% (S&P 500). Despite the exchange of trade threats between different countries, markets weren’t unusually volatile. The S&P 500 moved by more than +/- 1% on only two days during the month. This may suggest markets didn’t react much to what was then just talk of a trade war.

The MSCI Emerging Markets Index closed down 4.15%. International developed markets did a bit better, with the MSCI EAFE Index finishing the month down 1.22%.

As interest rates ended the month higher, bonds fell slightly, with the Bloomberg Barclays Aggregate Index falling by 0.12%.

Now that we’re halfway through 2018, let’s take a quick look back at how markets have done year to date. Domestic small caps have been the big winner since Jan. 1, up +9.39%, and large caps have gained +2.65%. Returns haven’t been as good overseas. Emerging markets have fallen 6.66%, and developed markets have dropped 2.75%. So far, bonds are down by 1.62% for the year.

Why it happened.

Governments lobbed tariff threats back and forth across borders and oceans, starting at the G-7 summit in Canada in early June. Amid talk of tariffs on steel, bourbon, and Harleys, we see that not all assets are equally affected by trade. Smaller companies tend to do less business internationally than larger firms, and so small-cap stocks had a stronger month than large caps.

Likewise, emerging markets overseas have been more affected by the trade spats than developed markets. Other factors also were at play for international stocks. Worries about debt in emerging markets weakened their currencies and hurt returns.

The dollar was stronger overall for June, and the domestic economy continues to hum along. Early in the month, employment levels came in at their lowest in recent history. The Federal Reserve raised interest rates and signaled two more possible increases this year, reflecting its optimistic outlook on our economy.

What it means for you.

Your portfolio may be slightly down for June, for both stocks and bonds were down overall. However, because you have limited exposure to small-cap and, especially, emerging-market stocks, your overall returns aren’t driven by the larger swings of these riskier assets. You’re investing for the long term, so keep your sights on your goals.

Because we build your portfolio specifically for you, the more you tell us about yourself — your goals, other retirement assets, and how comfortable you are with risk — the better we can tailor your investments to your unique situation. Please log into your Financial Engines account or call one of our advisors to tell us more.

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Financial Engines Market Update, Q2 2018: So far, so good …

Domestic equity markets led the way in the second quarter of 2018, with solid performance from both small and large companies. Strong corporate earnings, buoyant consumer sentiment, and excellent job markets all contributed to positive returns and lower volatility. Large-cap stocks in the S&P 500 gained +3.4% for the quarter, pushing year-to-date returns positive. Stocks of smaller companies, represented by the S&P SmallCap 600, surged +8.8% in the second quarter. Equity markets continued to climb despite further tightening by the Federal Reserve (Fed), which raised short-term interest rates.

On the international front, a strengthening dollar and ongoing tensions stemming from the possibility of a trade war took a toll on international equity returns. The MSCI Europe, Australasia, and Far East (EAFE) index lost another 1.2% for the quarter and was down 2.8% for the first half of the year.

Bonds were nearly flat for the quarter, despite the Fed’s continuing tightening. The Bloomberg Barclays U.S. Aggregate Bond index lost 0.2% over the last three months. For the year, bonds are down 1.6%. Muted inflation and rising short-term interest rates caused the yield curve to flatten in the last month.

The Financial Engines perspective.

While the second-quarter volatility of equity markets was significantly lower than in the first quarter, plenty of news kept investors on edge. The biggest concerns were around increased tariffs announced by the U.S. These triggered retaliatory moves from the European Union and China, raising the specter of a damaging trade war. So far, the negative effect of political events on the markets has been modest, but sentiment can change quickly. In these times of heightened political and economic tensions, it pays to be broadly diversified. Remember, Financial Engines continues to monitor markets and update your allocation to help keep you on track.

Have questions?

Our advisors are here to help.

 

© 2018 Financial Engines. All rights reserved. This publication is for informational purposes only and does not constitute investment advice or an offer to buy or sell any security. Future market movements may differ significantly from the expectations expressed herein, and past performance is no guarantee of future results. Financial Engines assumes no liability in connection with the use of the information and makes no warranties as to accuracy or completeness. Future results are not guaranteed by any party. Financial Engines® is a trademark of Financial Engines, Inc. All other intellectual property belongs to their respective owners. Index data is derived from information provided by Standard and Poor’s, Bloomberg Barclays Indices, and MSCI. The S&P 500 index and the S&P SmallCap 600 Index are proprietary to and are calculated, distributed and marketed by S&P Opco, LLC (a subsidiary of S&P Dow Jones Indices LLC), its affiliates and/or its licensors and has been licensed for use. S&P®, S&P 500® and S&P SmallCap 600®, among other famous marks, are registered trademarks of Standard & Poor’s Financial Services LLC, and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC. © 2018 S&P Dow Jones Indices LLC, its affiliates and/or its licensors. All rights reserved. Source: MSCI. The MSCI information may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be used to create any financial instruments or products or any indices. The MSCI information is provided on an “as is” basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively, the “MSCI Parties”) expressly disclaims all warranties (including, without limitation, any warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages.
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Is your 401(k) on autopilot?

Mother looks online for financial short term goals example for child

As American workers increasingly rely on employer-sponsored retirement plans as a primary source of retirement income, providers and employers need to find ways to help employees maximize this benefit. One way to achieve this goal is through automation.

Automation can be effective in helping employees start investing and ramp up their contribution levels. For example, automatic enrollment is helping more and more Americans — who might not otherwise save for retirement — make their financial future a priority by automatically placing a percentage of their salary into a default investment, usually a target-date fund or other type of balanced fund.

With automation, it’s all too common for investors to assume their retirement plan is “good to go” and therefore doesn’t need anything else — no rebalancing, no asset-allocation review, no additional savings increases. Such a “set it and forget it” mentality can leave you short of accumulating the nest egg you need to live the retirement lifestyle you want.

So, how do you balance the ease and convenience of automated features with the need to not set your retirement-planning efforts to autopilot? We’ve got five tips for you:

1. If you were auto-enrolled in your employer’s 401(k) or similar retirement-savings plan, don’t assume the target-date fund you were defaulted into is best suited for your personal situation.

Instead, create your own personalized asset allocation, or mix of investments. This is where in-plan advice, whether offered through your company as an employee benefit or through the plan administrator, can come in handy. Advisory services can help you pick the right funds and the right percentage to invest in each to best support your retirement goals — and an investing strategy tailored to you is a much better idea than throwing your money into a one-size-fits-all target-date fund.

2. If your plan offers an auto-increase feature, check to see if it’s employer- or employee-driven (i.e. does your employer opt you in, or is it up to you?).

If the latter, you’ll need to sign up yourself to reap the benefits. An automatic increase of 1% annually is a relatively painless way to gradually ratchet up your contributions. Let’s say you earn $50,000 annually. One percent of your salary is $500, which translates to saving just $41.67 per month in pre-tax income. Let’s take a look at how this annual 1% increase could impact your nest egg over time:

Frank and Tina, 35, each earn an annual salary of $50,000 and start contributing 6% to their 401(k) on the same day. However, Tina increases her contributions by 1% each year until she reaches the recommended rate of 15%. Frank continues saving 6% annually and never boosts his contribution rate. Assuming annual 3% raises and a 7% annual rate of return, Tina’s balance will be $966,395.81 in 30 years, while Frank’s balance at the same time will be $453,013.86. Tina’s nest egg is worth $513,381.95 more than Frank’s because she made small changes each year to the amount she saved.

3. Don’t assume an automatic 1% annual increase is all you need to do.

In addition to auto-increases, adjust your savings rate on your own when you receive a raise or tax refund, adjust your budget or finish paying off debt. Expecting a bonus at work this year? Immediately redirect half the amount to your retirement account. Saving more whenever possible can have a significant impact on the kind of lifestyle you can afford in your retirement years — make it standard practice and watch your nest egg grow without too much effort on your part.1

4. Sign up for auto-rebalancing, if offered.

Investors should rebalance their portfolios at least once or twice a year to evaluate for an appropriate level of risk. Don’t neglect to periodically rebalance your account yourself or enlist the help of a professional to show you what to do.

5. Review your asset allocation annually.

Now this is something that can’t be automated. Reviewing and rebalancing should include evaluating  your goals, risk tolerance, investing timeline or general finances that have changed your investing needs.

At the end of the day, automation shouldn’t equal autopilot. Enjoy the ease, convenience and simplicity of automated retirement investing, but don’t forget to stay in control of your investing strategy and big-picture planning. Your retirement depends on it!

1 The IRS sets annual limits on the amount of money you can contribute to employer-sponsored retirement plans. For 2018, savers under the age of 50 are able to sock away up to $18,500 in their 401(k) — but savers aged 50 and over are allowed to contribute an additional $6,000 on top of that.

Why saving is so hard … and some tips for making it easier.

Do you feel like a failure because no matter how hard you try, saving money is just plain difficult? You aren’t alone. According to Harvard economist Sendhil Mullainathan and Princeton psychology professor Eldar Shafir, authors of the book, Scarcity: Why having too little means so much, “Saving can be affected by the very fact that you don’t have enough.”

No kidding, you’re thinking.

But it’s more complex than the obvious. Here’s the idea:

“If you have urgent current expenses to cover, the future priorities like college and retirement fall off your radar because they are simply less pressing. Scarcity of attention [read that again!] prevents us from seeing what’s really important. The psychology of scarcity engrosses us in only our present needs.”

So maybe you’re thinking, “Fine, there’s some mind-over-matter work I need to do here. But I still don’t have enough, so how the heck can I save for the things that are really important?” They aren’t saying it’s simple, but they do say it’s possible. You’ll need to take some steps to put your long-term interests higher up on your list.

Here are the tips they offer:

  • Automate saving. Take advantage of tools like automatic deductions for your 401(k) and auto transfers at your bank to build your emergency fund.
  • Focus on a goal. In a study looking at goals, those who received a monthly reminder were 6% more likely to save. When that reminder included a photo, it went up to 16%. Create a goal, add pictures that will inspire you, and put it where you’ll see it.
  • Keep your priorities straight. If you don’t have a steady paycheck, saving can be very hard. But interestingly, the authors cite a study showing that when someone gets a sudden windfall of $10,000, they’re more likely to spend $20,000 because they think they have all this extra money. Instead of spending the money, it should go into a savings account.

Saving isn’t easy. But with some focus and perseverance, you can make changes that can help you reach your long-term goals.

 

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