January is an excellent time to crank up your 401(k) plan, and it probably needs a refresh after a year of gains, dividends, interest payments, and contributions. Here are a few suggestions to help you get started.
- Increase your annual contribution amount if you’re not adding the maximum amount to your plan. If you’re contributing 10% of your pay, consider increasing it to 12%. For example, if your annual salary is $50,000, an extra 2% is $1,000 per year, which could grow to more than $57,000 in twenty years. Also, the additional $1,000 annual contribution equates to about $40 per pay period.
- Max out your contributions. The maximum amount is $20,500. If you turn fifty in 2022 (at any time), you can add another $6,500.
- Increase your allocation to stocks. If your current stock allocation is 60%, consider raising it to 70% or 80%. The extra stock exposure can give your investments a boost to the tune of about 1% to 2% per year. Also, you’ll have the opportunity to buy in all types of market conditions since you’re contributing to your plan every pay period.
- Rebalance your account. The market performed well last year, and your asset allocation is probably out of whack if you did nothing. For example, if you started last year with 60% stocks and 40% bonds, it could now be 70% stocks and 30% bonds. January is an excellent time to rebalance and adjust your investments.
- Consider a target-date fund if you don’t want to hassle with specific investments or rebalancing your accounts. Target-date funds are all-in-one funds, so all you have to do is pick the year you’re retiring and move your assets to that one holding. For example, if you’re retiring in 2030, then choose the 2030 target-date fund. Simple.
- Update your beneficiary designations. Did you incur a life event last year? Did you get married or have a child? Did you lose a loved one or get divorced? If so, then change your beneficiary designation to reflect your current status.
Retirement comes at you fast, so make sure you’re doing all you can today to ensure your golden years are truly golden.
Retirement is not the end of the road. It is the beginning of the open highway. ~ Anonymous
January 12, 2022
Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.
Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.