MONEY

Maxed out Your 401(k)? Here’s How to Save More for Retirement

Pile of money
B.A.E. Inc.—Alamy

My 401(k) contribution has been capped at 6%. How do I save more for retirement? — Frankie L., Arlington, Va.

As you’ve found, the IRS limits 401(k) contributions by high earners — chiefly those who earned more than $115,000 in 2012 — unless their company ensures that lower-paid workers are also saving for retirement.

Start by putting $5,500 ($6,500 if you’re at least 50 by year-end) into a Roth IRA, which offers tax-free withdrawals in retirement, says Moline, III., financial planner Marty Kurtz.

In 2013 your allowed contribution falls to zero if your income tops $188,000 ($127,000 if you’re single), but anyone under 70½ with earnings can fund a nondeductible IRA and then convert it to a Roth. But you may owe taxes on this back-door deposit if you have other traditional IRAs.

Then buy low-fee, tax-efficient funds in a taxable account, says Kurtz. Index funds work well; their infrequent trading minimizes taxable gains.

MONEY Ask the Expert

Investing Beyond Your Target-Date Fund

Many investors combine their target-date fund with one or more other investments. illustration: paul blow

Q. “I already invest in a target-date retirement fund. What should my next fund be?”– Errick Chiasson, Baldwinsville, N.Y.

A. Target-date funds are designed to provide not only a fully diversified portfolio in a single fund, but also an investing strategy. Their mix of stocks and bonds gradually becomes more conservative as you age, protecting your savings as you near retirement. So in theory these funds work best if you put your entire 401(k) into one.

In the real world, however, many savers don’t take such an exclusive approach. A recent Vanguard survey found that just under half of target-date investors in its 401(k) plans combine target funds with one or more other investments, in some cases even another target fund.

While mixing another fund with a target fund can be a reasonable choice, you have to be careful that doing so doesn’t leave you with an unruly mishmash instead of a coherent portfolio.

Straying from the target

One good reason for going beyond a target fund is to adjust how much risk you’re taking.

Let’s say you’re a young investor who likes the target-date concept because it frees you from having to create a portfolio on your own, but you’re anxious about having 90% of your money in stocks, a typical allocation for investors in their twenties and thirties. Transferring, say, 20% of your target fund’s balance into a diversified bond fund would give you a considerably less volatile portfolio.

Conversely, you could make a similar shift into a total stock market index fund to boost your 401(k)’s growth potential. This add-on strategy is a more effective way to tweak risk than picking a target fund with a later or earlier retirement date.

Once you get beyond this sort of simple fine-tuning, however, things can get hairy. Some investors employ a “core and explore” strategy in which they use a target fund as a foundation and then add funds that focus on certain sectors, such as emerging markets or real estate.

Problem is, most target funds already spread their assets widely both here and abroad. So you could end up doubling down on niche markets.

Besides, you may not enjoy enough extra return to make up for the added time and trouble of monitoring and re-balancing a considerably more complicated portfolio.

If you do go that route, plug all your retirement investments, including those outside your 401(k), into Morningstar’s Portfolio X-Ray tool (available free at troweprice.com). That way you can see your overall allocation and make sure you’re not inadvertently overweighting any areas.

But once you’re investing in so many other funds that your target fund essentially becomes a bit player, you may be better off simply building a portfolio from scratch.

MONEY Ask the Expert

Our Expert Reveals His Personal Retirement strategy

Q. I’ve gotten lots of valuable help from your column over the years, but have always wondered about your personal retirement strategy. Have you been faithful to your own advice? — Jim K., Madison, Wis.

A. I haven’t said much about my own finances in the more than 1,000 Ask the Expert columns I’ve written over the past 13 years. Everyone’s situation is different, so I wouldn’t want people to assume they should follow a particular strategy or invest in a certain way just because “The Expert” has done so.

But since I’ll be leaving MONEY at the end of this month, I thought it would be appropriate to share the overall approach I’ve taken to retirement planning during my 26 years at MONEY in the hope that readers might apply it not in every particular, but in a general way to their own planning.

I’m not going to get into the nitty-gritty details. My wife would have my head if I started divulging account balances and such. Rather, I’ll break down my retirement-planning efforts into two broad categories, specifically: What I’ve Done Reasonably Well and What I Could Have Done Better.

What I’ve done reasonably well

The single most effective thing I’ve done is save on a regular basis.

Whether my zeal for saving reflects an innate impulse, a reaction to my family’s precarious financial situation as I was growing up, a rational decision to stash away money for the future or a combination of these, I can’t say. But I can say that for whatever reason I’ve always tried to live below my means and contribute the max (or as close as I could get to it) to tax-advantaged retirement plans.

For example, as a freelance writer prior to joining MONEY, I opened and funded a Keogh account and then a SEP-IRA, both of which are retirement savings plans for the self-employed.

Once I became a MONEY staffer, I made it a point to take advantage of virtually every opportunity my employer offered to save, including the company 401(k) plan, which I funded to the max pretty much every year.

I also applied the 401(k) system of automatic payroll deductions to saving outside of tax-advantaged plans. In the late ’90s, I set up an automatic investing plan, directing a mutual fund company to transfer $300 a month (later increased to $500) from my checking account to a stock fund. I felt a pinch at first, but after a few months I adjusted quickly to having a little less spendable income.

Today, those monthly transfers, plus investment earnings, total in the low six figures. Hardly a fortune, but a nice little sum of what I think of as “extra” money, in the sense that I otherwise would have squandered that dough on lord knows what.

I think I’ve also done a decent job on the investing front. Not that I’ve employed any grand strategies. Far from it. My not-so-secret secret has been to keep it simple and hold the line on costs.

I’ve never had much faith in money managers’ ability to beat the market after investment costs, nor in my ability to predict which asset classes would perform best in the short-term. So for the most part I’ve tried to build a portfolio of low-cost broadly diversified index funds that track the overall stock and bond markets. Then I sat back and rode the long-term upward sweep of the financial markets.

Granted, that ride has been a bit bumpy at times. But I’ve found that the best way to deal with the market’s inherent uncertainty and volatility isn’t to try to outguess it by jumping in and out of the market. Rather, it’s to gauge your risk tolerance and then set a mix of stocks and bonds that will allow you to participate in the upswings while enduring the downturns without panicking and selling at the bottom.

One final trait that’s served me well has been my inclination to ignore the fads, crazes and shifting fashions that pop up so often in the investment world.

I suppose a critic could see this as a failing, my inability to embrace innovation. Perhaps. But over the years I’ve seen too many Next Big Things (option-income funds, world currency funds, government plus funds, auction-rate preferred securities, to name just a few) implode, hurting investors in the process.

So anytime someone touted a revolutionary new exchange-traded fund, an alternative investment designed to generate all-gain-no-pain or a novel withdrawal strategy guaranteed to boost your retirement income and extend the life of your nest egg at the same time, I reacted with a heightened sense of skepticism. I recommend you do the same.

What I could have done better

Of course, with the benefit of 20-20 hindsight we can all point to things that we’d do differently given a second chance. One area where I definitely could have improved (and still hope to do so in the future) is coordinating my wife’s retirement investments with my own.

You would think in these days of instant online access to investment accounts that a married couple could easily share information about how their 401(k)s and other savings are invested. But in the real world tasks like sifting through retirement accounts and making sure our various pots of savings are invested in a complementary way sometimes take a backseat to other work and family issues.

So despite assurances from both of us that “we’ll definitely sort out the finances this weekend,” a year slips by and my wife’s 401(k) balance with a former employer still hasn’t made its way into an IRA rollover or her new employer’s plan.

Another place my planning fell short was in moving my retirement portfolio to a more conservative stance as I, ahem, aged. The issue isn’t ignorance. I know that as you get older you should generally shift your portfolio more toward cash and bonds to preserve capital and protect against severe market downturns.

But even though every day in the mirror I saw a man approaching his 60s, in my mind I was still that young guy in the ’60s. I have since gotten my portfolio in shape. But I mention this shortcoming so other people out there will remember to keep their asset allocation in line with their biological age even if mentally and emotionally they feel much younger.

Finally, I could have prepared better for my next stage of life. I’m not actually retiring. I expect that one way or another I’ll continue weighing in about retirement planning, investing and personal finance. I’m also keeping my mind open, to paraphrase Monty Python, “for something completely different.”

Still, leaving the place where you’ve spent the major part of your career is a big deal, and ideally I should have given that transition more thought ahead of time, much as I’ve counseled others to do. That said, you can’t always plan your life down to the smallest details. You also have to be willing to leave yourself open to serendipity and chance.

So all in all the answer to your question is yes, I have largely been faithful to my own advice, despite the occasional lapse. And if it’s any consolation, I’ve found that as long as you get the big things in retirement planning right—save consistently, invest sensibly, avoid rash moves and ignore fads and marketing gimmicks — you’ll do just fine even as you make a few inevitable missteps along the way.

MONEY

3 basic steps to creating a retirement plan

I’m 40 and would like to begin preparing for retirement, but I don’t know what to do. How should I start? — Nick Z., Astoria, N.Y.

You, sir, need a plan.

A recent survey shows that people who’ve prepared a personal financial plan are more likely to feel as if they’re on track to meet financial goals, like saving for retirement.That makes perfect sense, since it’s hard to know whether you’re on course if you haven’t mapped one out.

Similarly, stats from the Employee Benefit Research Institute’s Retirement Confidence Survey demonstrate that people who’ve made an attempt to calculate how much they’ll need for retirement not only are more likely to put money away, they also aspire to higher savings targets.

But the payoff you get from planning extends beyond having a greater chance of achieving a secure and comfortable retirement down the road. Research also confirms that people who take control of their finances tend to be happier about their lives than those who don’t. In effect, you get to reap at least some of the reward of planning and saving for retirement before you actually retire.

So, how can you create a retirement plan that can help you simultaneously feel better about your life today and improve your retirement prospects down the road? Here’s a three-step guide:

1. Take stock of where you stand now: Start by pulling together the current balances of any money you have tucked away for retirement in all types of accounts — 401(k)s, IRAs, other company savings plans, even savings earmarked for retirement that are held in taxable accounts.

After you’ve added up all the balances, estimate the percentage of your total savings you have in each of these three broad asset categories: stocks (including stock mutual funds), bonds (and bond mutual funds) and cash equivalents (money-market funds, money-market accounts, CDs, etc.)

Related: Americans still worried about their financial future

Then calculate the percentage of your gross annual income that you save in a 401(k) or other workplace plans (including any company matching funds) and note the dollar amount that you stash in investments outside your workplace plan.

2. Plug this information into a good retirement calculator. By “good,” I mean a calculator that employes Monte Carlo-type simulations to allow for the variability in investment returns.

Among the free online calculators that do this are T. Rowe Price’s Retirement Income Calculator and Fidelity’s Retirement Quick Check.

In addition to the savings and investment information I mentioned above, you’ll also want to include an estimate of the age you intend to retire, your projected Social Security benefit and the percentage of your pre-retirement salary you’ll need to maintain an acceptable standard of living in retirement.

Clearly, the younger you are, the “squishier” these estimates are likely to be. Just do your best and be reasonable.

If you’re 40 and just beginning to save, then it would probably be unrealistic to expect to retire anytime before your mid-to-late ’60s, and even that may be ambitious.

As for the percentage of pre-retirement income you’ll require, anywhere between 70% to 90% is a credible estimate. You can get your projected Social Security benefit by going to Social Security’s Retirement Estimator.

Once you’ve loaded all this information into the calculator, you’ll get an estimate of the probability you’ll be able to retire at the age you indicated with the income you specified. If you haven’t been saving and investing regularly for retirement, your chances are probably going to be uncomfortably low — maybe even well below 50%.

But don’t panic. Your goal at this point is to improve your prospects as much as possible in the time you have left. The way to do that is to rerun the analysis with different assumptions to see which changes, alone and in combination with others, improve your outlook the most.

Related: Make your money last all through retirement

What you’ll likely find is that you’ll get the biggest boost by saving more and postponing retirement a few years. Investing more aggressively isn’t likely to help as much, and could backfire.

Even though investing better isn’t likely to improve your outlook as much as saving more or working a few more years, you don’t want to squander your savings on a haphazard investment strategy or foolish investments.

So I recommend you settle on an asset allocation, or stocks-bonds mix, that’s appropriate for your age and, aside from occasional rebalancing, leave it alone, except to shift more toward bonds as you get closer to retirement. Creating as much of that portfolio as possible with index funds will hold costs down and increase your potential return. If you’re not confident about your ability to build a portfolio on your own, you can invest in a target-date retirement fund or use one as a guide for creating your own portfolio.

3. Follow through — and periodically reassess. All this effort will be for naught, however, if you don’t actually put the plan into place and, most importantly, save as much as you can.

You’ll get the biggest bang for your savings buck by contributing to tax-advantaged plans like a 401(k) or IRA. If the 401(k) offers matching funds, be sure to contribute at least enough to get the full match.

Once you’ve exhausted your tax-advantaged options, you can move on to tax-efficient investments, such as index funds, ETFs or tax-managed funds, in taxable accounts.

Related: Social Security’s role in your retirement portfolio

Retirement planning isn’t something you do once and then forget about it.You’ll need to periodically assess your progress and make adjustments to stay on track. So go through the process I’ve outlined every couple of years, stepping up the frequency to annually as your career winds down.

When you’re within ten or so years of your anticipated retirement date, you could very well find that, despite your best efforts, you haven’t accumulated enough resources to allow you to retire on schedule and lead the lifestyle you’d like. At that point, you can weigh options such as working longer, taking a part-time gig in retirement, scaling back your post-career lifestyle or looking for ways to stretch your resources by, say, taking out a reverse mortgage or relocating to an area with lower living costs.

Ultimately, no plan can guarantee you’ll be able to achieve the retirement you envision. But I can assure you that your chances of retiring in comfort will be much, much lower if you don’t have a plan at all.

MONEY Ask the Expert

Where Social Security Fits in Your Retirement Portfolio

Q. Can I consider Social Security the bond portion of my portfolio and invest a higher percentage of my savings in stocks? — Michael H., Pittsboro, Ind.

A. Social Security does function somewhat like a bond in that it provides steady income (although unlike most bond payments, Social Security’s payouts increase with inflation). So, in theory at least, it makes sense to factor in your Social Security benefit when deciding how to invest your savings in retirement.

As a practical matter, however, you need to be careful about how far you take this notion, as you could end up with a portfolio that many retirees might consider too risky.

Here’s an example. Let’s assume you retire at age 66 and that you need real, or inflation-adjusted, income of $60,000 a year, $20,000 of which will come from Social Security. And let’s also say youhave $1 million in savings and that you divvy up that nest egg equally between stocks and bonds in order to have a reasonable balance between long-term growth and short-term protection against market setbacks.

If you think of Social Security only as a stream of income and forget about the fact that it’s also kind of like a bond,then the issue you face boils down to how to get the rest of the income you need from your $1 million nest egg. If you go to an online retirement calculator, plug in savings of $1 million,an allocation of50% in stocks and 50% in bonds and assume a $40,000 initial withdrawal that is annually increased by inflation, you’ll see that there’s a roughly 80% chance your savings will last at least 30 years.

But this approach ignores the fact that Social Security also acts somewhat like a big bond.

Indeed, many economists would say that you don’t just have $1 million in assets. You have $1 million, plus a “Social Security” bond that makes inflation-adjusted payments of $20,000 a year. They’d also say that by not taking that bond into account, you may be investing too cautiously, ending up with more in bonds than you should. In so doing, you may be giving up a significant amount of investment return, and extra retirement income.

You can argue about how to set the value of that Social Security bond. But in today’s interest rate environment, William Meyer of Social Security Solutions, a firm that helps people decide when to claim their benefits, estimates its value would be roughly $500,000 for someone whose full retirement age for Social Security purposes is 66 and who begins collecting payments at that age.

Considered from this vantage point, you would have the equivalent of $1.5 million — $1 million in savings, plus a Social Security bond valued at $500,000. Which means if you want to maintain an investment mix of 50% stocks and 50% bonds, you would put $750,000 of your $1 million savings into stocks.

The remaining $250,000 would go into bonds, which, combined with your $500,000 Social Security bond, would give you $750,000 in bonds overall, resulting in an effective 50-50 stocks-bonds split for the $1.5 million.

But here’s the rub: If you look only at the actual assets you have access to — that is, your $1 million in savings — you’ve got 75% in stocks ($750,000 of your $1 million) and 25% in bonds ($250,000 of your $1 million). That’s a pretty aggressive portfolio for a retiree.

Related: 4 ways the market could really surprise you

Meyer agrees that such a high stock stake would “freak out” a lot of people, as it’s more prone to sizable setbacks. But he also argues that the higher volatility of such a portfolio shouldn’t unduly upset you because you also have those guaranteed Social Security payments coming in every month regardless of what’s going on in the financial markets.

So the value of that Social Security bond holds up even when the market is falling apart. Thus, if you take a broader view, your portfolio isn’t as volatile as it may seem.

In a purely logical sense, he’s right. But I’m also reminded of 19th century humorist Edgar William Nye’s famous quote that “Wagner’s music is better than it sounds.” Which is to say that you can’t always go by logic alone, especially when it comes to something like your lifetime savings. You’ve also got to consider the emotional and psychological impact of how you invest that money.

I think most retirees are going to focus on the account balance they can see, the $1 million, not the combination of that amount plus a hypothetical asset value they can’t actually see, or tap into for that matter.

So even if they own the theoretical equivalent of a $500,000 Social Security bond, I’m not sure that most investors would be prepared to handle the volatility of a $1 million nest egg invested 75% in stocks and 25% in bonds if a 50-50 split is more their speed.

Besides, if your nest egg is all you have to get you through emergencies and absorb unexpected costs, it’s important you don’t unduly expose it to the vicissitudes of the market. After all, if that money runs out, it’s not as if you can cash in a portion of your Social Security bond to pay for larger-than-expected health care expenses.

And while a $1 million nest egg invested in a blend of 75% stocks-25% bonds has roughly the same likelihood of generating $40,000 a year throughout retirement as a 50-50 mix does — and could generate even more — you run a larger risk of exhausting your savings if the market takes a dive early in retirement.

Related: Do you need an investment adviser?

That said, I could see situations in which factoring in Social Security might lead you to invest more aggressively.

For example, if Social Security, alone or combined with some other type of guaranteed income, such as a pension, covers so much of your living expenses that a big downturn in the value of your savings wouldn’t force you to scale back your lifestyle, a more stock-heavy portfolio with the potential for higher returns could be a reasonable way to go.

Even then, however, tilting more toward stocks would make sense only if you also have the emotional and psychological tolerance to handle the potentially larger setbacks.

Bottom line: I think you should consider your Social Security payments when deciding how to allocate your savings between stocks and bonds in retirement. Ultimately, though, whatever mix you come up with for the actual savings you have in retirement accounts should be one that has a realistic shot of generating the income you need in retirement –and that you’ll be comfortable sticking with even if the market nose dives.

MONEY Ask the Expert

3 Tips for Talking Retirement With Your Spouse

Have a heart-to-heart conversation about your retirement plans with your spouse. Getty Images

Q. How do I get my spouse on the same page as me when it comes to saving for retirement? — David H.

A. Retirement planning isn’t the most romantic topic in the world, so you may not want to bring this up on Valentine’s Day. But it is important that you and your wife have a tete-a-tete (or heart-to-heart, if you prefer) not just about saving, but about developing a comprehensive strategy to prepare for retirement.

Unfortunately, far too many couples aren’t having such conversations. When Fidelity polled 648 married couples in 2011, for example, a third didn’t agree or didn’t know where they planned to live in retirement, almost half didn’t see eye to eye about whether they would continue to work in retirement and nearly two-thirds disagreed about whether they had a plan to create post-career income.

This failure to communicate can be especially worrisome for women. They’re statistically likely to outlive their spouses, yet because they’re generally not as engaged in investing and planning as their husbands, they’re often not prepared to manage the household finances on their own.

Indeed, only half as many wives as husbands (35% vs. 72%) polled by Fidelity felt completely confident they could take full responsibility for retirement planning.

To assure you’re both on the same page, here are three steps you and your better half should take:

First, do a retirement reality check. Before making any moves, you and your wife need to know whether you’re currently on the path to a secure retirement.

You can do that by revving up an online retirement calculator and plugging in your ages, income, how much you’re saving now, your retirement account balances and the age at which you hope to retire. This will give you an estimate of your chances of being able to achieve your retirement goal if you continue doing what you’re doing.

If those chances are uncomfortably low — say, less than 75% or so — then you and your wife can see how making adjustments, such as saving more or postponing retirement a few years, can boost them.

By doing this sort of analysis together — or at least reviewing the results jointly — you’ll both know where you stand now and what you have to do if you want a reasonable shot at maintaining an acceptable standard of living in retirement.

Second, synchronize your efforts. When it comes to retirement planning, a couple working in unison will do better than each spouse going it alone. If you’re both working, start by making sure that, as a couple, you’re getting the most out of your company retirement plans.

Let’s say one spouse’s 401(k) has a more generous matching policy. In that case, rather than each spouse simply contributing the same percentage of salary to their individual plans, a couple may be able to get a bigger bang from the same total contributions by directing a larger share of their savings to the more generous plan.

Make sure you’re also investing in synch. That not only means agreeing on the appropriate mix of stocks vs. bonds for your household, but that you’re achieving that target most efficiently.

Related: Long-term investing: Keep it simple

For example, if your 401(k) has a good lineup of low-cost stock index funds but underwhelming bond choices, then to the extent possible you’ll want to do your stock investing in your plan and get your bond exposure in your spouse’s plan.

When you’re closing in on retirement, you also need to think hard about coordinating how and when you’ll claim Social Security to maximize your benefits as a couple. Generally, it pays for the spouse who qualifies for a higher benefit to postpone taking it until age 70, while the other spouse begins collecting checks sooner.

Related: Are you saving enough for retirement?

But with so many different scenarios based on a couple’s ages and earnings histories — and since tens or even hundreds of thousands of dollars in benefits is potentially at stake — you may want to check out services such as Social Security Solutions and Maximize My Social Security that, for a fee, can help you find the right strategy for claiming benefits given your situation.

Third, keep in touch with each other. Retirement planning isn’t the sort of thing you do once and then put on autopilot for the next decade. Ideally, you and your spouse should go through this exercise once a year or so, plugging updated information into the calculator and seeing whether you’re still on course.

If you’ve fallen behind, you can then talk about making adjustments to get back on track.

As part of this annual process, you should also review your portfolio to make sure your investment choices have performed in line with their peers and market benchmarks — and, if necessary, bring your overall retirement portfolio back to its target stocks-bonds mix.

So as soon as the mood is right, I recommend you broach the subject of retirement planning with your spouse. It may not go over as well as a dozen roses. But the benefit you and your wife will receive from engaging in this discussion will continue long after the flowers have wilted.

MONEY withdrawal strategy

How Much Can You Withdraw From Your Retirement Savings?

Recalculate each year how much you can safely take out of your retirement savings. illustration: paul blow

From the years you spend tending to your portfolio to the time when you finally get to enjoy sweet success, you face questions about what to do. Ace these and prosper.

This story is part of Money magazine’s story 5 retirement choices: Get ‘em right, live well which covers big decisions that can dramatically boost your income in retirement.

Once you determine how much of a saver you are, you have several more decisions to make — including how to safely draw down your retirement savings.

Decision No. 5: How much can you draw from your savings?

The decision: After you stop working, you’ll have to figure out how much you can safely take out of your retirement portfolio each year — a daunting task.

Why it’s important: The conventional strategy is to start with a modest withdrawal rate — typically 4% or so — and then adjust for inflation annually.

Doing that usually means you’ll have an 80% or so chance that your savings will last at least 30 years.

Related: 3 tips for tapping your nest egg

When it comes to tapping your retirement accounts, however, you’re walking a fine line: You don’t want to run out of money — even a 4% withdrawal rate can deplete your savings quickly if the market dives right after you retire.

You also don’t want to be so frugal that you end up with a huge balance you could have enjoyed earlier. Follow the 4% regimen strictly and see your investments perform well, and you could wind up late in life with as much money, if not more, than you started with, which means you would have scrimped more than was necessary.

Best move: Recalculate your withdrawals every year to take into account your current account balances and the fact that your nest egg doesn’t have to support you for as long.

Morningstar estimates that annually adjusting the amount you pull from savings rather than simply upping your initial draw by the inflation rate can increase the amount of spendable income you pull from your portfolio by nearly 9%.

“It’s the single most effective way of boosting your income during retirement,” says Morning-star’s Blanchett.

As a practical matter, though, recalculating your withdrawal rate this way can be quite complicated. So unless you’re working with a financial planner capable of doing the number crunching for you, your best bet is to go to an online tool like T. Rowe Price’s Retirement Income Calculator every year, plug in your most up-to-date information, and adjust your withdrawals up or down as necessary.

With a decision this big, you don’t want to blindly stick to the 4% rule or any other rigid system for spending down the hard-earned rewards of your years of careful planning, saving, and investing.

 

MONEY Taxes

Retiring? Make the Best Use of Tax-Deferred Plans

From the years you spend tending to your portfolio to the time when you finally get to enjoy sweet success, you face questions about what to do. Ace these and prosper.

This story is part of Money magazine’s story 5 retirement choices: Get ‘em right, live well which covers big decisions that can dramatically boost your income in retirement.

Once you determine how much of a saver you are, you have several more decisions to make — including how to best take advantage of tax-deferred plans.

Decision No. 4: What’s the best use of tax-deferred plans?

The decision: When it comes to your 401(k), IRA, and Roth IRA, you potentially face two decisions. One is divvying up your investments between taxable and tax-advantaged accounts. The other is when to tap each type of account.

Why it’s important: You have virtually no control over what happens to tax rates. But you can reduce the drag that taxes can have on your investments.

Regardless of how Congress may change taxes in the future, you’ll almost certainly continue to face different tax rates on different types of investments.All gains in 401(k)s and traditional IRAs are taxed at ordinary income rates when withdrawn (a top rate of39.6% in 2013); outside of these plans, you face lower rates on long-term capital gains and dividends (a max of 20% in 2013).

You can minimize the tax man’s take by keeping investments like stock index funds, stock ETFs, and dividend funds in taxable accounts to take advantage of long-term capital gains rates and holding bond funds and actively managed stock funds that trade a lot in tax-deferred accounts.

In retirement, the idea is to blunt the effect of taxes by tapping your nest egg in a tax-efficient manner. The traditional advice is to pull money from taxable accounts first, where you’ll presumable pay the lower capital gains rate, then move on to tax-deferred accounts like 401(k)s and IRAs, and finally Roth IRAs. The balances in your tax-advantaged accounts will have more time to compound tax-free.

Best move: While these strategies can be effective — Morningstar estimates that following both in retirement can up your income by roughly 8% — stay flexible. In fact, says David Blanchett, Morningstar’s head of retirement research, “you should maintain your target stocks/bonds mix first and then allocate your assets as best you can for tax efficiency.”

Related: The other way to invest in a Roth IRA

Similarly, you don’t want to be too rigid about withdrawals. In some years, for example, you may be able to sell taxable investments at a loss and use that loss to offset taxes on your 401(k) or IRA withdrawals. By liquidating taxable accounts early in retirement, you lose that flexibility. And once you reach age 70½, you’re required to draw at least some money from your IRA and, unless you’re still working, your 401(k).

Besides, you can’t know what the tax system will look like down the road. Having savings in a variety of accounts that receive different tax treatment gives you more leeway for managing withdrawals — and your tax bill — later.

 

MONEY financial advisers

Do You Really Need An Investment Adviser?

From the years you spend tending to your portfolio to the time when you finally get to enjoy sweet success, you face questions about what to do. Ace these and prosper.

This story is part of Money magazine’s story 5 retirement choices: Get ‘em right, live well which covers big decisions that can dramatically boost your income in retirement.

Once you determine how much of a saver you are, you have several more decisions to make — including whether you should pay for the advice of a financial planner.

Decision No. 3: How much help do you really need?

The decision: As you get deeper into retirement investing, you may find yourself at a crossroads: Should you go it alone — set your own asset allocation, choose funds, monitor your progress, make adjustments — or do you need professional input? In retirement, can you tackle the tricky drawdown solo?

There’s no one right answer. The decision comes down to your comfort level and confidence, plus your ease with the online tools that make a DIY approach easier.

Why it’s important: You can pay the skimpiest fees possible by picking index funds yourself.

If you prefer giving your money to an active fund manager in hopes of beating the market, you’ll pay another half a percentage point or more a year. And turning your money over to an adviser can add 1% a year to your costs.

The benefit of holding the line on expenses is pretty intuitive when you’re saving for retirement. The less you spend on fees, the more of your gains you get to keep. Over a 35-year career, paying one percentage point less annually can mean a 20% larger nest egg.

Keeping a lid on expenses after you’ve retired is equally important. By reining in costs you may be able of reduce the chances of running out of money. And you’ll be able to draw more from your portfolio every year.

Best move: Take advantage of free asset allocation and investment selection tools in your company’s retirement plan or at fund company sites.

Last year the Department of Labor began requiring employers to be more transparent about 401(k) fees, which should make it easier for you to home in on the lowest-cost investments in your plain.

Outside your plan, you can turn to online tools like Morningstar’s Fund Screener, which allows you to sort funds by their expense ratios. And our MONEY 50 includes ETFs that charge as little as 0.05%.

When you do need help, say as you’re ready to retire or retired, an alternative to paying a pro 1% of your assets a year is to periodically have a planner evaluate your progress. You’ll pay $150 to $200 an hour, or about $1,000, assuming about five hours for the checkup.

 

MONEY Investing

Where To Put Your Retirement Money

From the years you spend tending to your portfolio to the time when you finally get to enjoy sweet success, you face questions about what to do. Ace these and prosper.

This story is part of Money magazine’s story 5 retirement choices: Get ‘em right, live well which covers big decisions that can dramatically boost your income in retirement.

Once you determine how much of a saver you are, you have several more decisions to make — including how you invest your portfolio.

Decision No. 2: How should you divide up your money?

The decision: Once you’ve amassed a portfolio worth more than five figures, you may wonder whether you should branch out from plain-vanilla stock and bond funds.

To hear some advisers tell it, you can’t have a truly diversified portfolio unless you spread your money among virtually every asset class, sector, and subsector under the sun: hedge funds, currency, single-country funds, precious metals, exotic ETFs.

Why it’s important: You can capture more than enough of the benefits of diversification — solid returns while minimizing risk — with a relatively simple stocks/bonds mix.

Related: Betting your retirement on stocks

Start by making sure you own a broad swath of U.S. stocks and bonds. Then add developed and emerging foreign markets.

For inflation protection, you might pick up some real estate and TIPS. Adding more to this basic blend isn’t likely to appreciably boost your performance.

In fact, stocking up on a dozen or more different assets may work against you. One reason is the phenomenon that asset-allocation expert William Bernstein refers to as “overgrazing” — as more and more investors plow money into a newly discovered alternative investment, the lower its expected return.

Related: Investing in TIPS – Can retirees beat inflation?

“The first ones in get sirloin, but the latecomers get hamburger or worse,” says Bernstein. Many nontraditional assets also come with hefty fees.

As you pile on more investments, monitoring and managing them become harder.

“If you’ve got upwards of 20 different investments in 401(k)s, IRAs, and taxable accounts, you’re talking about a blizzard of trading every time you rebalance,” says Wealthcare Capital Management CEO David Loeper.

Best move: The simplest way to create this mix is by using index funds or ETFs from our MONEY 50 list. Aside from simplicity, they have the advantage of certainty: These funds strictly follow defined benchmarks, so you know exactly how they’ll invest.

Most important, though, resist the urge to jump onto the alternative investments bandwagon. Says Bernstein: “Wall Street needs to sell them, but you don’t need to buy them.”

 

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