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Reboot your retirement

(MoneyWatch) December marked the fifth anniversary of the beginning of the recession and for many Americans, it has taken all of that time to get their retirement planning back on track. According to Fidelity Investment's analysis of its 12 million 401(k) accounts, the average annual employee's contribution grew 7.3 percent over the past five years to $5,900 at the end of the third quarter of 2012.

That sounds like good news, but at the same time, financial advisory firm HelloWallet found that more than one in four workers still dip into retirement funds to fund everything from mortgages, credit cards and other bills. Additionally, new reports by the AARP Public Policy Institute indicate that future retirees will live on just 73 percent of their work income compared with the 80 percent that current retirees live on. Factor in higher future health care costs and the figure falls to 55 percent.

So what can you do to reboot your retirement? Here are some of the most frequently asked questions that I field about retirement plans.

What's more important: paying down credit card debt, saving for a rainy day or putting money into retirement?

Hands-down, the winner is debt pay-down, especially if you are carrying high interest loans. The next step is to establish your emergency reserve fund with 6 to 12 months of living expenses and then, start investing in your retirement plan.

What should my target retirement contribution be?

The first hurdle is to contribute the amount necessary to qualify for your company's match. The next milestone would be to put 15 percent into the plan. For those with the available cash flow, retirement plan nirvana would be to allocate up to the federal government limit for this year, which is $17,500, plus an additional $5,500 if you are over the age of 50.

Should I automatically use my employer's plan?

Not necessarily. With last year's new 401K rules, every plan must disclose its total fees to participants, so you will know exactly what your plan costs. The best plans have fees that total less than 1 percent, with a variety investment options. If your plan has expenses closer to 2 percent annually, expensive funds and you make under the limit for IRA deductions ($58,000 for singles, $92,000 married filing jointly), you may want to contribute up to the match level and then consider an IRA or a Roth IRA. If you earn more, the best bet is to stick with the least expensive investment options (see below) and lobby your employer for a better plan!

How should I invest my inside my retirement plan?

So few fund managers beat the index against which they are measured, that it's amazing that anyone invests in managed funds at all, but they do. That said, if your retirement plan offers index funds, use them! The median actively managed plan charges over 1.1 percent annually, while an index is usually about 0.1 percent. Wouldn't you prefer that the one percent drop to your bottom line? If you are using target date funds within your plan, be sure to understand exactly how the managers invest your money. Many of these hybrid funds can be riskier than participants realize and they can be more expensive than index funds.

How much company stock should I own inside my retirement account?

Who could forget the millions of dollars of retirement savings that were wiped out when Enron declared bankruptcy in 2001? That event was a wake up call to all plan participants who owned their company's stock inside their 401(k) plans. A good rule of thumb is to keep only 5 to 10 percent of the total account value in company stock. If your company makes its matching contribution in company stock, be vigilant about selling it. One way to manage the process is to select automatic rebalancing every six months. By doing so, you will ensure that you sell the stock and diversify your account with other investment choices.

These five years have been financially devastating, which is why retirement funding has fallen off the radar for many Americans. As the recovery continues, the goal is to rebuild in a sensible and methodical way.

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