We have a looming Fiscal Cliff, we have infantile politicians bickering about it, and we have Jim Cramer screaming and ranting about whatever. In this environment, here are my best tips for 401(k) investors (a hint these are the same tips I would have offered if this was 2011 or 2010, or most any other year):
Stick with it
During the 2008-2009 market decline, many 401(k) participants lowered their deferral rates or stopped salary deferrals altogether. Clearly those participants who stuck with their salary deferrals and their investment strategy throughout are generally happy with the results given the market’s performance over the past three years. The point is that consistent savings and sticking with a plan plays a key role in accumulating 401(k) assets for retirement over time.
Contribute as much as you can
I’ve read many studies pertaining to retirement success. Virtually all of them cite the amount saved over one’s working life as the single biggest factor in achieving a financially successful retirement. At the very least make sure you are contributing enough to earn any match offered by your employer.
View your 401(k) as part of your overall portfolio
Far too many participants view their 401(k) accounts in a vacuum. The better approach is to treat this as a part of your overall portfolio. Your outside investments might include a spouse’s retirement plan, various IRAs, old 401(k) accounts left at former employers, taxable accounts, various individual stocks and bonds, and other investments such as rental property. The point is to view your 401(k) account in light your overall portfolio and allocate your holdings accordingly.
Don’t ignore your 401(k)
There were many stories during 2008-2009 about 401(k) participants who couldn’t bear to open their account statements. Part of the reason that the participants who stuck with their plan did so much better according to a Fidelity study was due to the fact that they bought shares at lower prices during the market decline and then benefited from the ensuing rally that started in March of 2009. As painful as it is, review your account at regular intervals and rebalance when holdings fall outside the target allocation range you have set. Even better if your plan offers automatic rebalancing, take advantage of it.
Use Target-Date Funds with caution
The concept of Target Date Funds is great. Invest in the fund with a target date closest to your projected retirement date. The manager adjusts the level of stocks as you get closer to the target date. Participants get professional management of their investments. The reality is that different funds from different families with the same target date often have widely different allocations and levels of investment risk. The quality of the underlying funds differs among various fund families. If this route seems attractive to you, it is vital that you review the Target Date Funds offered by your plan. Don’t automatically default to the fund with the target date closest to your projected retirement, rather look at the allocation of the various funds in the series and pick the one that best fits your situation. Also look under the hood at the fund’s underlying investments and be sure you understand how the fund invests your hard-earned money. This extends to all aspects of the fund including the fund’s glide path into retirement. Personally I like Target Date Funds for younger workers who might not have much in the way of outside investments; I’m not a fan for investors within 15 or so years of retirement. These folks need to have a portfolio and a financial plan that are working in harmony.
Your 401(k) can be a great retirement savings vehicle. Like any other investment, it does take work to ensure that your savings are working hard for your retirement.
Please feel free to contact me with questions about your 401(k) plan and your retirement planning needs.
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