Managing your 401(k) is a critical aspect of preparing for a secure retirement.
Whether you’re just starting or you’ve been contributing for years, it’s essential to regularly evaluate your plan to ensure it aligns with your financial goals and positions you to maximize your savings. To help you make the most of your 401(k), here are five important questions to ask yourself.
1. Am I Contributing Enough to Get the Full Employer Match?
One of the easiest ways to boost your retirement savings is to take full advantage of your employer’s match. Many employers offer a match on your contributions, which is essentially free money added to your retirement account.
- Why Does the Employer Match Matter? Employer matching contributions can significantly enhance your retirement savings. For instance, if your employer matches 50% of your contributions up to 6% of your salary, not contributing enough to capture the full match means you’re leaving money on the table.
- How to Ensure You’re Maximizing the Match? Review your contribution rate and adjust it to at least the minimum required to receive the full match. For example, if your employer matches up to 6%, ensure you’re contributing at least 6% of your salary.
- What’s the Long-Term Impact of Employer Matching? Over time, these contributions, along with the compounded growth, can greatly enhance your retirement nest egg. Missing out on these contributions can reduce the overall growth potential of your 401(k).
If you’re not sure what your employer offers, check your plan documents or speak with your HR department. You can also listen to our Wealth Strategies Unleashed podcast episode about how to invest in your 401(k) for more insights on maximizing your contributions.
2. Do I Understand the Fees Associated with My 401(k)?
Fees can quietly erode your 401(k) balance over time, so understanding them is crucial. While some fees are unavoidable, being aware of what you’re paying can help you make informed decisions and possibly reduce costs.
Types of Fees in a 401(k)
- Administrative fees cover the cost of managing the plan and can vary significantly.
- Investment Management fees are charged by the funds in which your 401(k) is invested and are often expressed as an expense ratio.
- Individual Service fees for optional services such as taking out a loan or making a withdrawal.
What’s the Impact of Fees on Your Savings?
Even small fees can have a big impact over time. For example, a 1% annual fee might seem small, but over 30 years, it could reduce your total savings by a significant amount.
How to Minimize Fees?
Consider investing in lower-cost index funds or ETFs within your 401(k). Make sure you review your plan’s fee disclosures, and if you find the fees to be too high, explore other investment options within your plan. Regularly reviewing and understanding your 401(k) fees can save you thousands of dollars over the life of your account.
3. Is My 401(k) Aligned with My Risk Tolerance and Retirement Goals?
Your 401(k) should be tailored to your personal risk tolerance and retirement timeline. Misalignment can either expose you to unnecessary risk or limit your potential returns.
Risk tolerance is your ability and willingness to endure market fluctuations. Younger investors may have a higher risk tolerance because they have more time to recover from market downturns, while older investors might prefer more conservative investments.
Ensure that your investments match your retirement goals. For example, if you plan to retire in 20 years, a growth-oriented portfolio might be suitable. Conversely, if you’re closer to retirement, you might want to shift towards more stable investments like bonds.
Over time, your asset allocation can drift due to market performance. Regularly rebalancing your portfolio ensures that it stays aligned with your risk tolerance and goals. For instance, if stocks have outperformed bonds, your portfolio may now be riskier than intended.
Don’t forget to use target-date funds as a simple way to automatically adjust your investment mix as you approach your retirement date.
4. Am I Regularly Reviewing and Rebalancing My 401(k) Investments?
Regularly reviewing your 401(k) investments is essential for staying on track with your retirement goals. Market changes can alter your asset allocation, making your portfolio riskier or more conservative than intended.
Why Regular Reviews Are Important: At least once a year, review your 401(k) to ensure your investment mix aligns with your risk tolerance and goals. This is especially important after significant market movements or life changes, such as a new job or approaching retirement.
Steps to Rebalance Your 401(k)
- Check your current allocation and compare your current investment mix to your target allocation.
- Adjust your investments and if necessary, sell portions of overperforming assets and buy underperforming ones to bring your portfolio back in line.
- Set Up automatic rebalancing, as many 401(k) plans offer an automatic rebalancing feature that adjusts your investments for you at set intervals.
Benefits of Regular Rebalancing?
Rebalancing helps maintain your desired level of risk and can potentially enhance returns by buying low and selling high.
Pro Tip: Schedule a yearly review of your 401(k) on your birthday or a significant date, so it becomes a habit.
5. Do I Have a Plan for What to Do with My 401(k) if I Change Jobs?
Changing jobs can be a great opportunity to reassess your 401(k) strategy. You’ll need to decide what to do with your old 401(k), and your decision can have significant tax and investment implications.
What Options do You Have When Changing Jobs?
- Leave It With Your Former Employer: This option requires no immediate action but may limit your ability to make contributions or changes.
- Roll It Over to Your New Employer’s Plan: This can simplify your retirement savings and keep everything in one place.
- Roll It Over to an IRA: This offers the most control over your investments but requires setting up a new account.
- Cash It Out: While tempting, cashing out your 401(k) can lead to hefty taxes and penalties, reducing your retirement savings.
Be mindful of fees, investment options, and potential penalties associated with each choice. For a deeper dive, check out this blog post on the top 5 things to keep in mind when rolling over your 401(k).
Contact a financial advisor to help you navigate the complexities of rolling over your 401(k) and ensure you’re making the best decision for your financial future.
Taking the time to ask yourself these five critical questions about your 401(k) can help you make the most of your retirement savings. Regularly evaluating your contributions, understanding fees, aligning investments with your goals, rebalancing, and having a plan for job changes are all essential steps in managing your 401(k) effectively. By staying proactive and informed, you can better secure your financial future and retire with confidence.
