Knowing what to do with your 401k can seem like a herculean task, especially for those who have little interest in analyzing the myriad of options made available in today’s retirement plans. However, the proverbial “the dog ate my homework” excuse won’t work when you get to retirement and didn’t bother to take full advantage of this valuable retirement vehicle, so here are a few tips to absolutely dominate your 401k!
SAVE EARLY AND OFTEN
The power of saving early and often is profound. Take two millennials, Lisa and Jim for example. Lisa begins saving $5,000/year at age 25 and continues until age 35 for a total contribution of $50,000. Jim on the other hand doesn’t bother to begin saving until age 35. From there he saves $5,000/year for 30 years until he reaches 65, contributing a total of $150,000 over 30 years.
So who has more money at age 65? Despite the fact that Jim saved $100,000 more money and did so for nearly 30 years, he would still end up with less money than Lisa who simply started saving early and often!
The takeaway? Start saving into your 401k now. As a millennial, your biggest asset is time! Try not to squander it.
THE COMPANY MATCH IS YOUR BEST FRIEND
According to a recent study by Financial Engines, over 30% of those age 25-30 do not take full advantage of their employer match, meaning they do not contribute enough to their 401(k) to receive a matching contribution on behalf of their company.
Take for example, a millennial who is earning $60,000/year and works at a company that matches 50% of every dollar up to 10%. If that employee only contributes 5% a year or $3,000 they are missing out on an additional $1,500 that the employer would contribute if the employee bumped up their savings to 10%.
Balancing student loan payments, rent, utility bills, and still finding room to save into your 401k can be very difficult, but those that can find a way to squeak out an extra percent or two of their income into their retirement savings plan each year will be really glad they did.
SPEAK UP ABOUT FEES
Fees can have a dramatic impact on the success of your 401k, yet 6 out of 10 employees didn’t even know they were paying anything for it. Every retirement savings plan has fees and making sure that they are appropriately priced for the services rendered is important.
A simple way to do this is to check out an online 401k fee analyzer. America’s Best 401k Fee Checker tool, which is a retirement savings plan provider spearheaded by Tony Robbins, an acclaimed personal finance expert is a great place to start. The tool even lets you forward the results to your company so that they can take action if needed.
DIVERSIFY, DIVERSIFY, DIVERSIFY
Ever heard the saying “don’t put all your eggs in one basket?” They were talking about your 401k. Diversification serves as a buffer to lessen the impact of short-term market fluctuations. If you invest your money in a broadly diversified basket of stock and bond funds you are far less likely to see your money take large swings downward or even worse disappear, than you are if you simply put all your money into one fund. Many retirement savings plan options offer various types of diversification tools, some may help make a recommended allocation based on your age and comfort level with market fluctuations, while others have tools that will diversify your money for you (i.e. a Target Date Fund).
DON’T FORGET TO RECALIBRATE YOUR 401k INVESTMENTS
First, don’t forget to rebalance, which is just a fancy way of saying to update your allocation every now and then to ensure that it remains balanced. For example, imagine you invested your 401k into 80% stock funds and 20% bond funds. After one year the stock market was up big and bonds had gotten hit hard.
Thankfully you were diversified to help weather some of the ups and downs, but it is likely that your stock funds have increased in value while your bond funds have decreased. This means that your allocation could now look more like 90% stock and 10% bond rather than the original 80%/20% breakdown.
Due to the inherent fluctuations of the market it is good to consider “rebalancing” at least once per year to ensure your allocation remains consistent with your comfort level.
BE CAREFUL WITH COMPANY STOCK
Many large corporations allow employees to invest in their company stock through their 401k or through another type of retirement vehicle like an Employee Stock Purchase Plan (ESSP). This is oftentimes a great benefit, especially when the company is doing well, but don’t let the allure of purchasing company stock with pre-tax dollars or at a discount blind you to the risks.
Typically the rule of thumb is to never have more than 10%-20% of your investable assets tied up in your company stock, because in a worse-case scenario like Enron you could lose both your income and a large percentage of your assets in the blink of an eye.