Financial Planning Friday: 3 Steps to take right now with your 401(k)

October 13th, 2017 by Anchor Bay Capital's Investment Team

You probably received a quarterly statement recently showing your progress in your retirement plan for the last 3 months.  As you review your account balance and investment gains and losses, here are 3 items that you may want to review and adjust before the end of the year.

Are you really contributing enough to your plan?

This year the maximum contribution to a 401(k) is $18,000.  You can also add an additional $6,000 if you are over age 50.  Take some time to calculate how much you have contributed for the year and ask yourself if you can save any additional money.  If you are not close to maxing out the contribution limit, set a goal using a percentage of income like 10% or 15% of your income.  Once you make this calculation and have evaluated if you have room in your budget, go online and change your contribution percentage.  Your future self will thank you for it!

Evaluate your asset allocation.

In a year like this, when the stock market has performed well, you should be earning money in your account.  We always like to see this happen, however long stock market streaks tend to lead to people making emotional decisions by guessing what will happen next.  Overconfidence can lead investors to take on too much risk in hopes of boosting returns.  On the other side, doomsayers may make the mistake of getting out of the market all together to protect their account from a downturn.   Both of these extremes can cause you to miss out over the long-term.  You should re-balance your stock, bond, and cash mix at least once a year to make sure it is in line with your objectives.

Also, pay attention to the fees in your investments.  Each mutual fund in your account charges an internal fee.  This fee directly lowers your investment returns.  It is important to pay attention to these fund costs because if you can participate in market gains for a lower cost, you will be better off over the years.

Make after-tax contributions

Many retirement plans give you the ability to contribute on an after-tax or Roth basis.  By doing this, you build a tax-free portion of your retirement nest egg.  This can be a smart strategy because if you have money that you can access in retirement that is income tax free, you will have more control over the taxes that you pay in retirement.

Here is an example:  Let’s say you need $100,000 to live on in retirement.  You could take $50,000 from your taxable account and $50,000 from your tax-free account.  This gives you a $100,000 income, but you may only pay income taxes on $50,000.

As you adjust your retirement savings, it is a smart idea to consider an after-tax contribution, whether in your company retirement plan or through a Roth IRA.