Retirement savings plan: A guide to getting control

Keeping track of retirement accounts and savings can be a challenge. Follow the steps in this quick guide to take control.

After a decade or more into your career, you may have changed jobs and opened 401(k) accounts with more than one employer. You also may have started a traditional IRA or Roth IRA for additional retirement savings.

Taking time to review your retirement savings plan consistently throughout the years can help you decide when and how to roll over accounts or change investment allocations to better fit your current financial goals.

Here are four steps to help you gain control of your retirement savings plan.

 

1. Review former employer-sponsored retirement accounts

First, review your financial records to assess how many 401(k) and other retirement accounts you have, where they’re located and their balances.

Maybe you have one or more 401(k) accounts from multiple employers. Maybe you rolled over a 401(k) account from a previous job into a new 401(k) or a traditional IRA, or perhaps you cashed out instead.

If you find a retirement account you’ve forgotten, avoid treating it like an unexpected windfall. “If you have a 401(k) balance that you feel is small, the worst thing you can do is to just cash it out,” says Jacob Kujala, an advanced insurance planning specialist with U.S. Bank. Repeatedly cashing out can set back your retirement savings. In addition, if you are younger than 59½, withdrawing money from a 401(k) will generally trigger a 10 percent penalty plus federal and state income taxes on the distribution.

If you leave your previous 401(k) in place, your investments have the potential to compound over time.

 

2. Consider consolidating accounts

Once you have a handle on your accounts, you can consolidate. For this step, it might be advantageous to work with a financial professional who can review your overall financial goals and suggest which types of accounts best fit your situation. “We want to make sure we understand the money’s purpose before we consolidate,” Kujala says.

To get started, collect the most recent statement from each retirement account — even if they’re a couple of quarters old, Kujala says. You can generally find quarterly statements online. From there, you and a financial professional can review these statements to help you decide which accounts to keep and which to consolidate. This involves looking at each retirement plan’s investment choices, as well as fees and maintenance.

If you want to roll over retirement accounts — moving the money without paying taxes or penalties — you have several options, depending on the account type.

 

The process of moving funds between accounts can vary. Again, working with a financial professional may help.

 

3. Rebalance your portfolio and allocations

If you’re consolidating accounts, this is also a good time to review investment allocations.

When you first set up your 401(k) or other retirement account, you likely chose to allocate your contributions between several types of investments, such as stocks and bonds, based on the level of risk that seemed appropriate for your age and current situation.

• The further you are from retirement, Kujala says, the more exposure you can have to stocks, which tend to be more volatile than fixed-income investments but also can outperform them over a longer period. For example, contributions to a Roth IRA are made with after-tax dollars, so you might select more stock exposure. In the long run, stocks are likely to generate larger investment gains than bonds, and you won’t have to pay income taxes on those Roth IRA gains when making withdrawals — as you would with a 401(k) or traditional IRA. “If you get the most growth in an asset that has already been taxed and won’t be taxed again, you get the most benefit long term,” Kujala explains.

• As you approach retirement, you can adjust your allocations, moving away from riskier equities and toward more stable, fixed-income holdings. Kujala suggests considering a type of mutual fund called a target date fund, which is a mix of investments based on your expected retirement year. Target date funds are broadly diversified and automatically adjust as your targeted retirement year approaches.

Again, it may help to talk with a financial professional about rebalancing your portfolio to suit your current age and retirement goals.

 

4. Assess your total savings

Once you have your retirement accounts under control, take a look at your overall savings. Make sure you have at least six months’ worth of your household income set aside (and easily accessible) for emergencies. “One way to quickly derail a great retirement savings plan is to have a financial emergency come up where you have to use your retirement funds, potentially triggering a penalty and certainly triggering income taxes on the distribution,” Kujala says. “Having an emergency fund can help you avoid that problem.” If six months sounds intimidating, start with three months and grow your savings from there.

Also, make sure you’re satisfied with the amount you’re saving for retirement. The general rule of thumb is 10-15 percent of your pre-tax salary each year. And finally, don’t forget to diversify your investment accounts. Doing so can help you reduce risk, maximize your savings and potentially lower your taxes.

 

After your retirement accounts are organized and rebalanced as necessary, review them annually. Armed with a clear picture of your savings, you can feel more confident about being on track for a financially healthy retirement.

 

Savings is only one part of the retirement equation. Review 10 other factors in our retirement planning checklist.