4 Things to Do Right Now If You Haven’t Looked at Your 401(k) Account in the Last 3 Months
If you’ve read the headlines lately, you know there is a retirement crisis in America.
According to a recent survey conducted for Bankrate by SSRS, 1 in 5 American adults have nothing saved for retirement or potential emergencies.¹
20% of those surveyed have saved 5% or less of their annual income.
Less than a third of all Americans have saved 11% or more of their yearly income.
But these stats don’t come as a shock to most financial experts. Greg McBride, CFA and Bankrate chief financial analyst responded to the survey saying, “This result has shown little change over the past few years, consistently coming in at 20 percent or 21 percent since 2016. Unfortunately, this means it hasn’t improved.”²
If you’ve been inconsistent with saving for retirement or haven’t been engaged with your retirement plan, don’t let this gloom and doom get you down.
There are 4 things you can do right now that will help you get your 401(k) account on track and working toward the retirement lifestyle you desire.
#1 Review Your 401(k) Account Statement
This may be stating the obvious, but the first thing you should do is open your statement and review it.
Regularly reviewing your 401(k) statements and making changes isn’t something that’s always top of mind.
In fact, compared with other things that require regular maintenance in our lives–such as oil changes and house maintenance–reviewing your workplace retirement savings and plan is at the bottom of the bucket.
We recently took to the streets to ask everyday people about important things they perform regular maintenance on.
Our street interview made one thing clear…people pay more attention to their cars, homes, and updating their electronic devices than they do maintaining what could be their largest asset–a 401(k) or workplace retirement account. When statements come in the mail each month, they toss them in the trash.
Reviewing your 401(k) statement might not be the most exciting read. But it’s important that you have a good understanding of the information that is provided to you.
Not only does it help you determine whether or not you’re on track to meet your financial goals, but it also transforms you from an apathetic investor to one engaged with your 401(k) account and your financial future.
Regularly reviewing your statement may also have a big impact on your overall returns and the confidence about achieving your goals for retirement.
Remember, if you don’t take care of your future self, no one else will.
So, do you open your statement every month? And, do you understand why you get what you are getting?
If the answer is No to one or both questions, we recommend you make the choice to become engaged with your retirement savings.
Open your statements when they arrive in the mail. If you don’t understand what you’re receiving, watch the video below.
Watch the video below to see how to read a 401(k) statement.
#2 Avoid Target Date Funds
Target date funds have grown wildly popular since they were introduced in 1994. Estimates state these funds have attracted more than $1 trillion.
Target date funds, also referred to as lifestyle funds and retirement date funds, are structured to automatically reallocate as you move through different life stages. You may know them as 2030, 2040, and 2050 funds.
As you age toward your target retirement date, the funds are thought to shift toward more conservative investments to protect your money.
On the surface, target date funds take the pain out of how to choose the right investments for investors. You simply choose a single target date fund, set it, and forget it.
Investing in target date funds and sitting back and not actively managing your retirement account is like saying there’s a one-size-fits-all investment strategy that works for everyone.
This doesn’t mean target date funds aren’t more beneficial for some investors than others. But for a majority of investors–investors just like you– there can be a downside.
First of all, by the very nature of what they are and do, target date funds fail to take into consideration that not all investors are created equal.
Individual investors are placed into the same asset allocation regardless of their salary and savings history, risk tolerance, past investment performance, lifestyle, and goals.
Who ever said that a one-size-fits-all investment works well for everyone? It just doesn’t make sense.
Secondly, the reality is that target date funds will often underperform, and do not do a good job of managing downside risk during tough markets.
Is that a risk that you want to take with your retirement assets?
If you are currently in a target date fund, we recommend you rethink this strategy. Or, at least look inside your fund’s portfolio and make sure the portion of stocks to bonds is at a level you’re comfortable with, and you’re comfortable with the level of risk you’re taking.
If you aren’t sure what you’ve invested in, open up your statement and check, or reach out to your plan representative. In either case, we recommend seeking expert third-party advice on how to best allocate your assets.
Download our guide 5 Ways Target Date Funds Fail to Live Up to Their Promise.
#3 Rebalance Your Account
Rebalancing is the process of realigning the weightings of the assets in the portfolio. This can involve periodically buying and/or selling assets in the portfolio in order to maintain the initial desired level of asset allocation.
Because it takes time, understanding, and effort, many people don’t take the time to rebalance. Or, they opt for a default option and select target date funds. Whatever the case, 80% of 401(k) investors fail to rebalance.³
Using a standardized portfolio allocation, such as a life cycle or target date fund, may be detrimental because it does not take into consideration your specific goals and risk tolerance.
And then there are people who think their employer is taking care of their 401(k) and making changes for them. This simply is not the case. It’s your money, and you’re responsible for what happens with it.
Because of this belief, few people rebalance their 401(k) account, and even those who do fail to manage risk through proper asset allocation.
At 401(k) Maneuver™, we recommend a customized solution that takes into consideration your unique retirement goals and objectives. We also recommend
rebalancing your account allocations every quarter, or four times a year.
Here’s why: rebalancing only the percentages of current holdings does not consider current market and economic conditions. The stock or mutual fund that you chose last year–or even last quarter–may or may not necessarily still be going in the right direction for you.
Not rebalancing also often results in more significant losses during bad markets. Therefore, properly allocating and rebalancing your retirement account–based on your specific objectives–can be extremely advantageous.
#4 Find a Way to Contribute More This Year
According to Vanguard’s How America Saves,⁴ only 13% of employees with retirement plans at work saved the then-maximum 401(k) contribution limit of $18,000 in 2017.
And only 14% of those 50 or older took advantage of plans offering catch-up contributions.
In 2019, the annual contribution limit was raised to $19,000 for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan.
For employees age 50 or older in the plans listed above, the additional contribution limit will stay the same for 2019 at $6,000. This means the annual contribution limit is $25,000 for those 50 or older.
There’s no better time than right now to review how much you’re currently contributing annually and to see if you can save more. Even a few hundred extra dollars saved may make a difference.
If you cannot contribute the maximum each year, at least contribute the minimum of what your company will match. Because when your company matches your contribution, it’s like getting free money.
If you’d like more tips on how to have more income at retirement, download our guide on
- “Over 90% of Americans make this 401(k) mistake”, Mauri Backman, The Motley Fool
- Vanguard, How America Saves. https://institutional.vanguard.com/VGApp/iip/site/institutional/researchcommentary/article/HowAmericaSaves2018