Your 401(k) plan may be your largest asset, even larger than your home. However, it appears most individuals pay little attention to this treasured asset. In my experience working with 401(k) providers, companies and several employees sign up for their plan without giving much thought to their contribution amount or investment choices. To increase your odds for a successful and confident retirement take time and get advice on setting up your plan.
According to the Employee Benefits Research Institute 18% of workers feel very confident about their ability to enjoy a comfortable retirement a number that hasn’t changed since 1993. What about the remaining 82%? 82% of the working population aren’t confident about the future of their retirement.
Here are few ideas to help you improve your 401(k) plan and your retirement.
Start. Do not delay in signing up for your company retirement plan. As soon as you’re eligible for your company 401(k), sign on the dotted line and start contributing to your plan. The sooner you start contributing to your plan the larger your retirement nest egg will be.
Max Out. You can contribute $18,000 to your plan each year. If you’re 50 or older, you can contribute an extra $6,000 to your plan for a total of $24,000. Contributing $18,000 for 45 years at 7% will grow to $5.1 million by the time you’re ready to retire.
Contribute. If you can’t afford to max out your contribution, contribute 10% of your income to the plan. If you can’t contribute 10%, then match your company match. If your company matches 4%, your contribution level should be 4%. If you earn $50,000 per year, your 10% contribution will be $5,000. Contributing $5,000 to your plan for 45 years growing at 7%, will be worth $1.4 million at your retirement.
Escalate. Your plan may include an auto-escalation button allowing you to increase your contribution percentage annually. For example, if you start contributing 4% to your plan, you can sign up for an annual 1% increase forever or until it reaches a pre-determined percentage. Your contribution this year will be 4% and next year it will increase to 5% and so on.
Diversify. Your plan probably has six to seven investment categories like large companies, small companies, international companies, alternative investments, bonds and cash. To be successful, you’ll need to own more growth investments than safe investments. A 70%/30% allocation might look like this: 35% to large companies, 10% to small companies, 20% to international companies, 5% to alternative investments and 30% to bonds. You don’t need to allocate any money to cash unless you’re retiring this year.
Be Aggressive. Your working career may span 45 years or more so take advantage of the long-term trend of the stock market. Also, you’ll be contributing to your 401(k) every two weeks giving you the opportunity to buy stocks when they’re up, down and sideways. I once worked with a group of anesthesiologists in Austin and, not surprisingly, the doctors with the most aggressive investment profile had the largest account balances. Some of the senior doctors I worked with had invested 100% of the 401(k)-balance invested in stocks when they were young and they never changed their asset allocation resulting in large nest eggs.
Rebalance. Rebalancing your 401(k) once per year will keep your desired risk level in tack. The best time to rebalance your plan is in January. A January rebalance will allow the dividends, interest payments and capital gains to be contributed to your plan from the previous year. Your plan might have an automatic rebalancing button you can turn on when you log in to your plan.
Align. It’s important for your contributions, asset allocation and rebalancing targets to be aligned. For example, if you’re contributing 35% to large companies, your asset allocation and rebalancing options should also be set to 35%.
Stay. In the gig economy workers are changing jobs every two to three years and, as a result, they may be hurting their retirement plan. By moving from one company to the next you’re leaving valuable dollars on the table by missing a company match or two. In addition, when you join a new company you may miss an enrollment window keeping you out of your new company plan for six months to a year. These small misses will have major implications on your retirement. If you’re employed by a good company with a solid retirement plan, then stay the course and let your retirement benefits accrue for you and your family.
Review. You should review your plan and investment choices once per year. You don’t need to spend much more time on your plan beyond your annual review. In fact, the less you touch your plan the better.
Treat your treasured asset with respect by contributing what you can afford, investing for growth and rebalancing annually. Allocating time and resources to your plan will allow you to have a much more bountiful retirement.
You can be young without money but you can’t be old without it. ~ Tennessee Williams.
Bill Parrot is the President and CEO of Parrott Wealth Management. If you need help with your retirement planning, please visit www.parrottwealth.com.
September 30, 2017