Allow for a moment of celebration with the news that 401(k) balances have risen to new highs, thanks in large part to the stellar performance of the stock market in 2013. I wrote about this same topic nearly a year ago, when the average balance had reached $80,000. Today, depending on who you ask, that number is anywhere from $89,000 - $102,000. It's a move in the right direction but there is still work to be done, especially considering that the majority of the funds in 401(k) plans are owned by Baby Boomers who are either approaching or already in retirement.

While the numbers may appear large, in many cases, they are not. Consider the family that is planning to retire within the next couple of years; they'll collect social security, maybe a pension (odd of these are slimmer each day), and have to rely on their 401(k)'s to provide them income to enjoy a comfortable retirement. With interest rates at current levels, generating cash flow that will provide income for period of 30 to 40 (or even 50) years can be challenging - but not impossible. Assuming a 4% withdrawal rate and a husband and wife each with $100,000 in their 401(k)s, they'll have around $8,000 per year, or approximately $650 per month to live off of. That's scary.

We need to avoid this scenario. Some things to consider, regardless of your age or experience with investments, that can help you avoid traps like those mentioned above:

  1. Give Yourself a Raise - Increase your contributions by 1% each year. Chances are you won't miss that 1% of your income, but you'll be giving yourself a default raise in retirement pay each year.
  2. Stay Away - Some folks like to check their account balances on a daily basis and try to time the market for when stocks are going to go down in value - don't do this. You'll drive yourself crazy, and unless you've got a crystal ball, chances are you won't be able to time the markets perfectly (or even very well at all).
  3. Better Than a Crystal Ball - Speaking of the crystal ball, you should simplify your investment selections. Pick four funds and put 25% of your contributions in each, that way, you'll have adequate diversification and it will be much easier to see how things are doing from time to time instead of comparing six or seven different funds to each other. Over time, this will save you time, and headaches when evaluating the performance of your 401(k).
The fact that 401(k) balances are increasing is great - but it's just a start. Remember, it's best to save early, but if it is too late for that, just start!

Chuck Wade, Financial Advisor

