Is your 401(k) in good shape? Is it properly allocated? Does your plan mitigate your tax burden? Do you have the right blend of growth and income?
For many investors, a 401(k) retirement plan is easy to simply set and forget. It's not difficult to see why; managing a 401(k) plan with the proper knowledge or time can be intimidating. However, your retirement depends on this important account's performance, so it's important to maximize your 401(k)'s potential for returns.
Read on to discover 9 ways to strengthen your 401(k).
What's your investment planning profile? Before you can make investment decisions and manage your retirement planning, it's essential to define your financial goals. How do you picture your retirement? Do you have other goals to invest for, such as a new home or college for your kids? Do you have debt to pay off? Identifying your financial goals as well as your tolerance for risk will help you tailor a plan of attack.
How well do you know your 401(k) plan?
Get a copy of your plan's documents and work with your 401(k) advisor to identify your available options and determine if your plan is working for you. If it's not, look into the possibility of moving some of your funds into other investment vehicles, such as an IRA.
Take full advantage of the tax and match benefits. The money you save in your 401(k) can be tax-deferred, which means you won't pay taxes on it until you take disbursements. These funds will grow over time thanks to compounding interest. If your employer offers matching funds, contribute the max to make the most of what's available to you.
Allocate properly and consistently. As asset management consultants will tell you, proper asset allocation is the key to proper diversification... and the key to mitigating risk. When making asset allocation decisions, consider:
- Your time horizon
- When you'll need to take distributions
- How much money you'll need in retirement
- Your risk tolerance
- What other assets you've invested
Beware company stock. Holding too much of your employer's stock can increase your exposure to risk. If the stock tumbles, you won't be properly diversified.
Keep emotion out of your financial planning. If the market drops, don't panic. In fact, don't react emotionally to market ups or downs. Instead, ignore the financial media's frantic headlines, focus on the long-term and stick to your plan.
Minimize your tax burden with a 401(k) rollover. If you switch jobs and want to bring your 401(k) along, be sure to do a 401(k) rollover directly into your new plan. Why? Because if you take a distribution, you'll pay state and federal taxes and, if you're under 59 1/2, you may pay a penalty, too.
Don't borrow from your 401(k). Even if interest rates are lower, don't borrow from your 401(k). Every dime you take out of that account is money that can't grow over time, so consider the true cost — the opportunity cost — before you borrow.
Retirement planning advisors recommend focusing on income and growth in retirement. After you've retired, it's still important to keep growing your investments, even though your focus may have shifted to fixed-income. Given today's low interest rates, keeping a bit of risk in your plan is essential.
Speak to your 401(k) advisor about the strategies that are right for you.