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.
The more retirement accounts you have, the easier it is to lose track of them. If you’re worried that your retirement savings may not be working hard enough for you, following these four steps can help you feel more in control.
1. Account for all your retirement savings 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 for U.S. Bancorp Investments.
If you leave your previous 401(k) in place, your investments have the potential to compound over time. Conversely, repeatedly cashing out can set back your retirement savings. In addition, if you’re 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.
2. Consider consolidating retirement accounts
Once you have a handle on your accounts, you may want to think about consolidation. 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. 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, fees, and maintenance.
If you want to roll over old employer-sponsored accounts 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
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. If you’re consolidating accounts, this is also a good time to review investment allocations.
The further you are from retirement, 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. You may want to consider 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 three-to-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.”
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, consolidated, 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.
Get more information on saving, preparing for and living in retirement in our retirement planning toolkit.