Our recent analysis of how U.S. workers have been saving for retirement over the past five years tells me we’ve come a long way – but that there’s also room for improvement.
Our Driving Plan Health report (PDF) — which is designed to help employers understand how they can help their employees save for retirement — tells us that more people than ever are participating in their company-sponsored retirement plan. It also tells me that more people are trying to diversify their 401(k) investments, which helps keep participants from being overweight in any one sector and can decrease the risks to their balances from sector declines.
Other stories in this series
- Study: More workers are saving for retirement
- 6 ways to build effective 401(k) plans
- How ready is your generation for retirement?
However, I’d like to see the numbers move up on deferral rates — the percentage that people and their employers put into their 401(k) plan with each paycheck.
We recommend that you save enough for retirement to replace at least 80 percent of your income. Regardless of where you are on your retirement savings path, here are six steps you can consider taking today toward better retirement health.
- Start saving today. Pay yourself first, and defer as much of your salary as you can on a pre-tax basis. If you have the option to join your employer’s 401(k) plan, enroll today. You may defer savings at a pre-tax rate up to $18,000 per year; participants age 50 and older can make up to $6,000 in additional catch-up contributions each year. If you do not have access to a workplace retirement plan, you can set up an automatic savings program and make systematic contributions — up to $5,500 if you are under age 50, or $6,500 if you are age 50 or older — through regular contributions to a Roth IRA (with after-tax dollars) or a traditional IRA (with pre-tax dollars), if you meet eligibility requirements. Establishing an automated routine supports regular, consistent saving habits.
- Get the company match, if it’s offered. If you are contributing to a 401(k), find out if there’s a company match. If there is, make sure you’re taking full advantage of it. Remember that the money your employer contributes on your behalf can be added to the amount you’re contributing; combining the two contributions helps give your overall savings a boost.
- Increase your rate of savings. Research shows that the No. 1 factor in saving for retirement is your contribution rate, which includes increasing your contribution rate on a regular basis. Find out if your employer’s plan offers the option to increase your contribution amount automatically and on a regular basis. That’s one less thing to remember and it’s an easy way to help you gradually save more in preparation for retirement. You can always change the increase rate or the limit for your automatic retirement plan contributions.
- Find out what type of investor you are. The way you divide your investments among the three basic investment categories — stocks, bonds, and stable value investments — is called your asset allocation. Your asset allocation is the big picture. Knowing your investor type — conservative, moderate, or aggressive — can provide a good starting point for determining which asset allocation makes the most sense for you. Use an online tool like the Wells Fargo Risk Tolerance Quiz1 to help you determine your risk tolerance.
- Make sure you’re diversified appropriately. This is sound advice whether you have a 401(k) plan or another type of investment vehicle. Diversification is among the three key factors that can have a huge impact on whether you will have adequate income replacement in retirement.
- Leave your savings alone. It may be tempting to spend your savings if you change jobs or if an unexpected expense pops up, but it is important to keep these assets growing in a tax-favored retirement account. Withdrawing money from your employer-sponsored plan can erode your retirement savings to the point where you may jeopardize your financial security in retirement. Keep your money working for you!
1 This information and any information provided by employees and representatives of Wells Fargo Bank, N.A. and its affiliates is intended to constitute investment education under U.S. Department of Labor guidance and does not constitute “investment advice” under the Employee Retirement Income Security Act of 1974. Neither Wells Fargo nor any of its affiliates, including employees, and representatives, may provide “investment advice” to any participant or beneficiary regarding the investment of assets in your employer-sponsored retirement plan. Please contact an investment, financial, tax, or legal advisor regarding your specific situation.
Wells Fargo Advisors is a trade name used by Wells Fargo Clearing Services, LLC and Wells Fargo Advisors Financial Network, LLC, Members SIPC, separate registered broker-dealers and non-bank affiliates of Wells Fargo & Company.