Take age into your analysis
Investment choices in a 401(k) can be heavily influenced by risk tolerance, but age should also be a factor, Denning says. People nearing retirement may want to make up some ground by being aggressive investors, but a falling stock market can greatly reduce what they already have, he says.
The time to be more aggressive, he says, is when you’re more than 15 years from retirement. At 10 to 15 years until retirement, a common recommendation is to be 60% or 70% in stocks and 40% or 30% in bonds, Denning says. Generally speaking, cut back equity investments 5% every five years, he says, and monitor asset allocation every three years.
“As people get older, they should be a little more conservative with asset allocation,” he says.
Be aggressive with early contributions
An easy way to be aggressive with a 401(k) outside of your asset breakdown is to invest what you can early in your career — at least enough to reach an employer match, says Denning, who recommends the 15-40-85 method. That means saving 15% of your income for 40 years, which should give you enough money at retirement to live on 85% of your preretirement income. As retirements increase in length, however, and depending on what you want your retirement to look like, your numbers may vary. Your Financial Advisor can help you determine what you need to save, even early on.
Many employers — 70% to 80% — match employee 401(k) contributions, Denning says. Historically, those matches most often have been dollar for dollar, he says, up to 4% of their salary. But just investing up to that level of employer match only gets workers to an 8% contribution.
Some employers have tried to help encourage their workers to save more by offering a 50% match for employees who contribute up to 8% of their salary. And, in general, people are saving more. Denning says the current average employee contribution is about 7.6% of salary. But most workers still fall short of annual contribution limits, which are $18,000 for 2017 ($24,000 for 401(k) contributors over age 50).
“People are not saving nearly enough for the type of retirement that they’re expecting,” he says. “The biggest lever they can pull is increasing their contribution rate.”