Four Steps For Boosting Your 401(k) Account Balance


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Members of 401(k) plans nationwide are feeling richer. The average account balance in plans run by Fidelity Investments hit $77,300 in the fourth quarter.

That was an all-time high since Fidelity -- the largest operator of 401(k)s -- began to track this data in 2007.

Workers ages 60 to 64 averaged $134,600. Studies of other plans industrywide show similar trends.

Still, even that balance for older workers would not be enough by itself to pay for many years of retirement. Using a common strategy of withdrawing 4% of your balance each year in retirement, your initial payout would be just $5,384.

So how can you boost your balance by retirement? Here are four steps that can be used in one form or another at any point of your work career.

• Start early. Time is one of your most powerful tools, says Brooks Herman, head of research at BrightScope, a financial information and research firm.

Imagine that starting at age 25 you're earning $60,000 and you kick in $500 a month to your account, which you invest in moderate growth funds.

Factoring in pay raises and bigger annual contributions, based on historic rates of return, an online eTrade calculator says you have a 70% chance of amassing a $679,000 portfolio by age 65.

If you start just two years earlier, odds are your nest egg would end up more than $68,000 bigger.

Too old to start early? Delaying retirement has a similar benefit.

• Contribute as much as possible. That not only puts more of your own money to work. It also helps you grab potentially free money.

"You should aim for the maximum company matching contribution," said Merrill Lynch's Debbie Howard, managing director of global corporate and institutional advisory services.

Otherwise, you're giving up what is basically a free pay raise, says Jim Wallace, another managing director.

• Consider using a Roth 401(k) account.

Contributions are not deducted from your taxable income. But earnings grow tax-free. And eligible withdrawals are also tax-free. Withdrawals from a regular 401(k) are taxed as ordinary income.

You end up with more aftertax take-home pay with a Roth if your tax bracket stays the same or rises in retirement, says Scott Cole, senior manager of Deloitte Consulting.

You can use a Roth only if the format is offered by your plan.

• Beware of high fees. Fees are one factor to consider in choosing among investment choices in your plan's menu.

"It can make a big difference between mutual funds that are otherwise very similar," said Simon Roy, president of Jemstep, an online investment adviser.

Suppose you have a $100,000 balance by age 40. You earn $80,000, contribute $8,000 a year and get a 6% average annual return.

If you invest in low-cost funds -- perhaps some index funds -- your annual fees could average 0.1%. But imagine that your neighbor, whose situation is identical to yours, invests in an actively managed fund that also returns 6% yearly. The average large-cap fund's fee is 1.31%.

By age 50 your balance would be $289,000, Roy says. Your neighbor's would be $262,000. By age 60 your balance would be $623,000, more than $100,000 bigger than your neighbor's.

Actively managed or passive is not the point. "High fees are the point," Roy said. "Avoid them if you can."

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing Mutual Funds
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