How to make the most of your 401(k)

Every so often you probably get an e-mail from your HR or Benefits department with some information about your 401(k) or 403(b). And if you are like most people you read it and say to yourself, “I wonder if this is really important?” or “Yeah, I should probably look at my 401(k) and make some changes”. Then you file that e-mail in the “this is important but I don’t ever look in this folder” folder. Then inevitably, that e-mail is eventually purged with other assorted e-mails and the cycle begins again with another e-mail.

Well, it’s time to break the cycle and get your 401(k) back on track!!

Here are four suggestions that will help boost your balance in the long run.

Contribute up to match

It’s really important to understand what the maximum percentage is that your employer will match with your contribution (usually between 4% and 8%). You should make that percentage your minimum contribution.

For example, your employer may match 50% of your contribution, up to 6%.  This means if you contribute 4% of your salary, then your employer will match 50% of that, or 2%.  In this scenario, to maximize your contributions, you should contribute at least 6%, so you receive the most you can from your employer, which would be 3%.

Increase your contributions when you get a raise

Once you’ve established your employer match maximum as your minimum, consider going even higher. If you can contribute a higher percentage right off the bat, great. If not, one easy way to bump up your contributions over time is to increase your percentage as soon as you get a raise.  This way part of your raise goes right to retirement and you won’t miss the money from your paycheck.

Diversify and rebalance (or pick a fund that does it for you)

Two really important investment principles are the concepts of diversification and rebalancing. Both should be done periodically. Typically no less than annually and typically no more than quarterly. Doing so can be difficult to remember and even more difficult to execute properly, so one strategy is to invest in a target date fund.

There is typically a choice in your plan like Vanguard Target Retirement 2050 or iShares Target Date 2040. Investing a substantial portion in the fund that has the year that corresponds with your planned retirement is generally a very good way to get diversification and periodic rebalancing. It may not be perfect and the fees may be high, but it should be good enough that any downside is mitigated by the diversification and rebalancing benefits that you will get.

Ask if the person giving you advice is a fiduciary 

It is a shock to many people that the person giving them investment advice doesn’t necessarily have to execute transactions in their best interests. A fiduciary does have to act in your best interest, and for that reason alone, it can be worth seeking out the opinion of a financial fiduciary who can look at the options you have, weigh the pros and cons and take into account any unique investment circumstances (e.g. an immediate need for cash) and different tolerances for risk (e.g. you are about to retire) that might make an alternative strategy more advantageous. They can also look at those e-mails from HR and help you determine if there is something you need to take action on or work into your overall financial plan. So please seek professional help from a fiduciary on investment matters that you are unsure of or are unique to your situation.

Jason Haviland, CFA, CEBS, PMP is the President and Founder of J. Bradford Investment Management in Nashua, NH. For more information, please visit www.jbradfordinvestments.com/about

PLEASE REMEMBER:

– INVESTING AND INVESTMENT MANAGEMENT INVOLVES RISK, INCLUDING THE LOSS OF YOUR INITIAL INVESTMENT OR ANY INVESTMENT GAINS.

– PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.

– THIS GENERIC INFORMATION IS PROVIDED FOR EDUCATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS A RECOMMENDATION FOR ANY INDIVIDUAL TO TAKE A SPECIFIC ACTION.

 

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