Financial Planning Friday: Spend Some Quality Time With Your 401k.

April 1st, 2016 by Anchor Bay Capital's Investment Team

With the tremendous responsibility of getting your work done and managing your current needs, you are also in charge of creating your own retirement paycheck.2nd

For most working individuals, their future retirement income will depend largely on how much personal savings they have put away.   We all have plenty of things consuming our attention right now, but since you are expected to know how your 401k works and you are expected to manage your investments to a substantial nest egg, it may be helpful to take some time and review your 401k to make sure it is working effectively for you.  Here are some things to consider:

Where to start?

Make sure you are familiar with your plan.

  • Do you know how to login and navigate the plan website to choose your contributions and investment options?
  • How much does your company match or contribute on your behalf? This information is key.  You want to maximize the benefits provided by your company.

Once you know what you have, you can start building your portfolio.

Does it really matter how you invest your money?

Of course!  When reviewing retirement accounts, I often hear, “I didn’t really know what funds to pick.” Understanding your investment options can be a challenge, and since each company plan offers different options there is not a right or wrong way to approach this subject, but generally there are some things you need to do to effectively invest your money.

  • Make sure you take the time to choose your investment allocation. Often, I see accounts where the money has been left in a default position.  This could be 100% in your company’s stock or sometimes the money is held in a cash asset earning less than 1%.
  • Think stocks for growth, bonds and real estate for income, and cash for safety. Understanding all of the asset classes like small cap or emerging markets is another discussion, so for more info on this check out our investment guide investment guide.
  • How much risk do you want to take? An old rule of thumb is to subtract your age from 100.  The number you get is the percentage of your portfolio to put in a growth position.  This may work when you are younger, but this may leave you a little too conservative when it comes time to retire.  Since you may spend as much time in retirement as you did working, keeping your money growing is important.  You also don’t want to be totally exposed to a big market downturn just as you are planning to retire. Make sure to consider your needs when evaluating your risk.  Do you need income, growth, or safety?  Your investments should reflect your goals.
  • Target date funds may not always be the best allocation. If you are choosing a target date at your retirement, you may be allocated too much in bonds and not experience the growth you need as you approach your retirement years.

Don’t give away your money.

An important factor in choosing your investments should be fees.  You have access to knowing how much each investment within your plan costs.  The fees associated with each fund can have a major impact on your overall return.  You may be invested in a stock mutual fund that charges 1.50% and at the same time there is a stock index mutual fund available in your plan with similar investment holdings that charges 0.25%.  By choosing the index fund in this scenario you are saving yourself 1.25% each year.  That savings adds up fast!

How often do you need to make changes?

Once you have set your allocation, you should avoid making changes too often.  Trying to time the market or change your allocation because of your emotions or feelings may really drag down your returns.  Instead follow a schedule to regularly rebalance your funds.  This means that you would login and reset your funds to the original allocation you chose.  If you started at 60% stocks and 40% bonds and you are now at 72% stocks and 28% bonds you would allocate 12% of stocks back to bonds.  Many plans have an automatic rebalance tool, but if you are doing it manually once a year should be sufficient to rebalance.

Did you know?

  • If you are over age 59 ½, your plan may allow you to rollover your funds to an IRA account even though you are still working. This can be helpful if you want to choose different investments than what your plan offers or save on expenses.  Some companies actually make this available to workers of any age, so it is worth checking on.
  • If you take a loan from your account, this loan has to be paid back through payroll. This means that if you leave the company and you haven’t paid back your loan, the amount owed is taxable income to you (you may also have to pay a 10% penalty on the amount if you are under 59 ½).
  • When you take income from a 401k it is taxed as ordinary income. This means that if you are going to be in the same or a higher tax bracket in the future, it may make sense to save money that will be tax-free in retirement.  A Roth IRA or Roth 401k, will give you a tax-free bucket of money.
  • If you don’t feel comfortable going it alone, Anchor Bay Capital, Inc. provides investment advice for your 401k. You can hire us to manage your 401k while you are working, so that you can focus on everything else you need to do.  Contact us for more info.