Perhaps you are one of the 54 million American workers participating in a 401(k). Those who choose to participate in their employers’ retirement plan stand to benefit in a number of ways. Not only are contributions tax-advantaged but the annual contribution limits are much higher than you get in a typical IRA. For 2017, workers under age 50 can put away up to $18,000, while those 50 and over can max out at $24,000. But a 401(k) plan is not something you can set and forget, if you have been neglecting yours you should be asking yourself these 3 questions.
(1) Am I saving as much as I should be?
According to Fidelity Investments, a good rule to follow is to have saved the equivalent of 1X your salary by age 30, and to have 10X your salary saved by age 67. To break this down further, here are recommended savings across your career:
2X salary by age 35
4X salary by age 45
6X salary by age 55
10X salary by age 65
Now because everyone’s lifestyle goals and expenses are unique, you may want to save more or less than the general rule. Your 401(k) representative / Financial Advisor will be able to provide you with a more specific savings goal and roadmap to achieve it.
In case you are not where you should be, don’t give up! Here are two simple and painless strategies to increase your savings:
– Increase your contribution by 1% annually. Such a small increase you will not even notice.
– Next time you receive a pay raise, immediately increase your 401(k) contribution by a portion of the raise.
(2) Am I contributing enough to get my full employer match?
While more than 50% of companies offer a match incentive in their 401(K) plan, 1 in 4 participants do not put enough of their own money in to take full advantage. The average employee who fails to capitalize on their full employer match forgoes $1,336 each year, which translates into $126,000 in lost savings over a typical career.
Your benefits department or 401(k) provider can tell you how your company match works. DON’T LEAVE FREE MONEY ON THE TABLE!
Another common issue regarding the match is when participants try to maximize their contribution limit before year end. While it feels good to check the box and get the savings out of the way, there are two really good reasons not to do this.
– Spreading your contributions across all 12 months allows you to take advantage of dollar-cost-averaging which helps to lower the average price of the investments you purchase, rather than buying in bulk on just a few days of the year.
– If you fully fund your 401(k) in less than 12 months you may be missing out on some of your employers’ match. Typically, the only reason you would max out your 401(k) before year end is if you plan to leave the company.
(3) Have I chosen the right investments?
When it comes to the investments you own in your 401(k), consider these 3 things:
Asset Allocation – What is the proper mix of stocks, bonds and cash to have? This depends on how much growth you need to achieve your savings goal, and how comfortable you are with taking financial risk. DON’T WAIT UNTIL THE NEXT MARKET CORRECTION TO DISCOVER YOU ARE NOT AS RISKY AS YOU THOUGHT. Your 401(k) representative / Financial Advisor can help you to determine your true risk tolerance.
Diversification – Within the mix of investments you own are you properly diversified? Do you own many different pieces of many different pies, or do you just own one large pie?
Cost – There are two ways to earn more returns on your investment choices, increased market performance and decreased cost. Growth and dividends come from market performance and are a factor of asset allocation, diversification, and luck. But how much you pay for your investments is something you control. Find out how much you are paying for your investments choices. Are there similar investment choices available at lower cost? When it comes to investing, a penny saved really is a penny earned.