When it comes to saving for retirement and building a portfolio to last a lifetime, most Americans are way behind the eight ball — and all of the other balls on the pool table. More than 54 percent of Americans report that the total value of their household's savings and investments, excluding the value of their primary home and any defined-benefit plans, is less than $25,000, according to the Employee Benefit Research Institute's annual Retirement Confidence survey. What's worse, 27 percent have less than $1,000 in assets. Just 11 percent have more than $250,000 set aside. Yes, those figures include Americans young and old, those just starting in the working world as well as those about to check out, but in the main, many Americans need to modify their saving and spending patterns to have any hope of enjoying a standard of living to which they've become accustomed. Here are some nest egg do's and don'ts, according to Hewitt Associates and Merrill Lynch:
Participate in your plan: If you're lucky enough to have a 401(k) at work, contribute to it. That will greatly improve your financial well-being, according to Bank of America Merrill Lynch, which has a new tool that looks at four plan-participant behaviors, including saving, investing, setting and monitoring retirement goals, and nest-egg preservation. Not surprisingly, the saving and investing behaviors — which represent 80 percent of the overall score — are the primary drivers of financial wellness.
Avoid risky behavior: In Merrill's new index, participants can receive a wellness score on a scale of 0 to 10, with 10 being a perfect score. Points are deducted from the overall wellness score of each participant based on symptoms associated with "at risk" behaviors.
What are those risky behaviors for which you might get dinged? Having an outstanding loan that represents 25 percent or more of your total 401(k) account balance; not having requested a proposed investment strategy; not using asset-allocation or target-date funds; concentrating in specific asset classes; concentrating in company stock; not taking full advantage of the company match; saving 2 percent or less; and not saving at all.
Increase your contribution rate. If you are participating in your 401(k), consider upping the percentage of your salary that you contribute, Hewitt said. Workers contribute, on average, 7 percent of their salary to a 401(k), but every little bit matters.
Contributing just 1 percent or 2 percent more of your salary to your 401(k) can have a dramatic effect on your retirement savings, Hewitt said.
For example, Hewitt said, a 30-year-old employee earning an average salary of $50,000 who increases her contribution rate from 4 percent to 6 percent will have accumulated an extra $295,000 by the time she reaches retirement age.
Put your plan on autopilot. Face it: When it comes to saving, inertia often gets the better of us. If you contribute 6 percent to your 401(k), it's likely to stay that way even if you get a raise. But, according to Hewitt, you should consider taking advantage of any and all tools that take the guesswork out of saving and investing. Consider signing up for automatic escalation and automatic rebalancing tools if your employer offers such options.
Take advantage of advice. The median annual return for employees using investment help was almost 2 percent higher than those who did not, according to a joint study by Hewitt Associates and Financial Engines.
According to Hewitt, one out of every two firms in its survey currently offers online investment guidance, and 39 percent offer online, third-party investment advisory services. In addition, 28 percent of employers currently offer managed accounts that let participants delegate management of their account to an outside professional.
Don't forfeit free money. It's hard to believe, but more than 25 percent of workers leave free money on the table. They contribute below the company-match threshold, according to Hewitt. Contribute enough to your 401(k) to receive your full employer match.
Don't cash out: If you change jobs or leave your current job, don't cash out your 401(k) savings. About 46 percent of employees cash out, Hewitt said. But that can have serious consequences. Typically, you'll pay a tax on the amount withdrawn and a 10 percent early withdrawal fee.
Don't overinvest in company stock. In Merrill's financial wellness index, you lose points for overinvesting in company stock because doing so means that both your human capital and your financial capital are tied to your employer. And if your employer goes belly-up, you lose your job and a good portion of your 401(k).