January is an excellent time to crank up your 401(k) plan, and it probably needs a refresh after a year of losses, dividends, interest payments, and contributions. Here are a few suggestions to help you get started.
- Max out your contributions. The maximum amount is $22,500. If you’re fifty or older, you can add another $7,500.
- Increase your annual contribution if you’re not maxing out 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.
- Increase your stock allocation. If your current stock allocation is 60%, consider raising it to 70% or 80%. After a losing year, the extra stock exposure could boost your plan as the stock market recovers.
- Rebalance your account. The market did not perform well last year, and your asset allocation is probably out of whack. For example, if you started last year with 60% stocks and 40% bonds, it could now be 50% stocks and 50% bonds. January is an excellent time to rebalance and adjust your investments.
- Consider a target-date fund if you don’t want to hassle selecting specific investments or rebalancing your accounts. Target-date funds are all-in-one, so all you need to do is pick the year you’re retiring and move your assets to that holding. For example, if you’re retiring in 2030, 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.
- IRA Rollover. If you lose your job, you can roll over your 401(k) plan to an IRA, leave it with your previous employer, roll it to your new employer, or cash it out. You may incur taxes and penalties if you decide to cash in your plan.
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 23, 2023
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.
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