Set It and Forget It Retirement Savings

Not everyone has the personal interest or energy to put a lot of effort into retirement savings. But we should all understand how important it is to have a nest egg when you are too old to work. Even if you plan to work until the day you die, things don’t always work out that way. For those who want to save for retirement without nursing along an investment account, there are ways to save that take little effort.

Surely the easiest way to save for retirement is a 401(k) plan, especially if you have an employer that will match your contributions. But even the self-employed can open and 401k that is easy to manage and grow. This is what we mean by “Set It and Forget It.”

The 401(k) plan has been around more than 25 years and has proven itself the simplest way to save money for retirement. Plan participants simply set up automatic deposits and check the balance of investments periodically to their risk tolerance. That’s why over 47 million Americans use the 401(k) to save for retirement.

Someone who starts a 401(k) at the start of his or her working life can easily amass millions in savings through regular, relatively painless contributions that grow over time. Even those who do not start until their forties can still have a shot and saving enough for a reasonable retirement. Catch-up contributions are allowed for workers age 50 and older to help them reach retirement goals, even if they are late getting started.

The added benefit of these plans is the free advice attached to the accounts. Most 401(k) plans are administered by investment firms that offer free analysis and tools online that help workers assess their risk tolerance, set goals, and manage the balance of investments quickly and easily.

In the early years of investing, 401(k) portfolios are typically heavy in riskier investments like stocks. As the participant ages, plans may shift to include a higher balance of low risk investments, but also lower profit, investments. This makes an older employee less likely to lose everything in the event of a stock market collapse. Many plans now offer investment accounts that follow this risk curve with age, without any input or work required by the plan participant.

Workers should work towards the goal of automatically depositing at least 15% of their gross income into a 401(k) each week. If they do so, they are likely to have about half of their income level to draw on during retirement, once adjusted for inflation. Social security benefits should add another 25% to provide retirees with a comfortable living in their golden years. Seniors could make up the balance through part time work, rental properties or outside pensions, or simply by living a lifestyle that requires less money to fund.

There are just two steps to creating a Set It and Forget It retirement. First, enroll in a 401(k) plan that automatically increases your contributions until they reach 15%. Second, choose a target-retirement fund that has a target date near your expected retirement date. The plan does the rest.

To get the most out of the retirement accounts available, there is a best strategy for workers to follow. First, contribute to your 401(k), up to the maximum amount your employer will match. Then, contribute up to the maximum ($5,000) possible on a separate Roth IRA. The balance should go back into your 401(k). Not only does this maximize your retirement investment, it also provides you with a mix of taxable and non-taxable funds to draw at retirement.

The self-employed aren’t getting any employer contributions. For this reason, it’s best to choose one of the plans tailored for your situation. This can be a Solo 401(k), also called a Defined Contribution plan. Other retirement plans for the self-employed such as a profit-sharing plan, Keogh or SEP will let you deduct contributions up to 2% of your self-employment income, maxing out at $49,000 or $54,500 for those over age 50.

But the Solo 401(k) has gained some improvements in recent years that make it more like a traditional employee’s plan. For instance, you can deduct $16,500 worth of contributions (assuming you make that much or more) and $22,000 if you are over 50 years old. You can then contribute another 20% of your self-employment income on top of that. Oh, and that $16,500 initial contribution can be made on an after-tax basis, giving you a nice little tax-free withdrawal when you retire. On the down side, there will be some set up and maintenance fees.