How to Stay on Track to Potentially Maximize 401(k) Performance in 2020
2020 is flying by, and, before we know it, it will be over. Make sure you meet your financial goals and stay on track to potentially maximize your 401(k) performance this year. Check out our tips below on exactly how to do this.
We took to the streets to ask everyday people about important things they perform regular maintenance on.
This 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–their 401(k).
While you might think you have better things to worry about than managing your 401(k), we encourage you to think again.
Because if you aren’t engaged with your 401(k), no one else will be.
It’s your money. Your account. Your financial future.
And it’s up to you to make sure you have enough money for retirement.
Yet, far too many people don’t understand what they are investing in.
Others don’t know how to read their 401(k) statement when it comes in the mail. Or even bother to look at it.
There are even some who think their employer takes care of their 401(k) for them, which is not the case.
If you really want to stay on track to potentially maximize your 401(k) performance, we encourage you to become engaged with your investments.
How you do this starts with a decision to take control of your financial future.
Do whatever you can to gain the knowledge you need to make informed decisions regarding your money, such as…
- Continue reading blogs like this.
- Read books on the subject.
- Consult a third-party expert.
Or watch our 401(k) Masterclass video. In as little as 13 minutes, you will discover 3 strategies that may supercharge your 401(k) performance.
Review Your Retirement Plan and Goals
According to Transamerica’s 2018 Retirement Survey, 46% of participants said they are guessing at how much they need to save for retirement.¹
With rising healthcare costs, inflation, taxes, down markets, and other unknown future variables, one thing is certain: if you don’t have a plan and take action on that plan now, you’re likely not going to have enough to retire.
Or worse, you may end up with so little saved that you might have to struggle to survive.
If you don’t have a plan in place, do it now.
Get crystal clear on when you will retire and how much you will need for the lifestyle you desire.
From there, take a look at how much you’ve already saved and figure out what you need to do to get back on track.
If you’re stuck, we recommend seeking third-party advice as soon as possible.
Check out our retirement calculator to see how much you may have at retirement, and calculate how professional help may improve your future retirement income.
If you do have a plan, when is the last time you reviewed it? Are you on track?
If not, figure out what you need to catch up, and then work the plan so you can stay on track to potentially maximize your 401(k) performance.
Commit to Saving More
Another way to stay on track to potentially maximize your 401(k) performance is to save more each month.
Employee 401(k) contribution limits are $19,500 for 2020. This applies to 401(k), 403(b), most 457 plans, and the federal Thrift Savings Plan.
For those age 50 and older, the 401(k) catch-up contribution limit will also increase $500–from $6,000 in 2019 to $6,500 in 2020.
If maximizing the contribution limit seems unreachable, that’s okay.
Time and consistency build wealth. So, do what you can do today to save a little bit more each and every month.
Here are two ways to do this…
#1 Think In Smaller Amounts
Oftentimes, people get overwhelmed just thinking about how they can save more.
Our advice: think in smaller amounts.
Saving 1 – 2% more this year than you did last year may make more of a difference to your retirement savings than you might think.
Let’s say you earn $65,000 a year and you saved an additional 1% more of your salary. That would mean an additional $54.16 extra a month contributed, or an additional $650 a year saved.
If you saved 2% of your $65,000 salary, you’d save an additional $1,300 a year, or $108.33 per month.
You can save 1 – 2% more this quarter over last or over what you contributed last year.
Just make sure the 1 – 2% is in addition to the percentage you’re already saving each month.
#2 Cut Small Expenses
Another way to find money to save: cut one or two items (or three, if you can!) from your monthly expenses.
While it may not seem like much, cutting just one expense adds up over time and may make a big impact on your retirement savings in the long run.
Let’s say you have a membership that’s $50 per month.
If you cut it out of your budget and instead contributed it to your retirement each month for 12 months, you would end up with $600 extra saved in a year’s time.
Find another $80 per month to cut from your budget, and that’s $960 you could save over the course of 12 months.
Cut both these expenses, and that gives you an extra $130 a month to put toward your 401(k) savings–or $1,560 additional contributed to your 401(k) in the next 12 months.
Sit down and figure out what to cut right now. Chances are, you will be amazed how easy it is to do without altering your lifestyle.
Adding It Up
Using the two examples from above, here’s what you could potentially save in addition to what you already are…
If you contribute 1% more of your $65,000 salary, that is $54.16/month extra you could save.
Cut just one expense from your budget that totals $80/month.
Add the two, and you could contribute $134.16 extra each month to your 401(k).
Do that for 12 months, and you have stashed away an extra $1,609.92.
Do you see how small contributions may make a significant impact on how much you’re able to save overall?
We encourage you to get out a pen, paper, and calculator and figure out how much extra you could potentially contribute.
We cannot stress enough how important it is to contribute at least the minimum of what your company will match.
When your company matches you, it’s free money to put toward retirement savings.
If you aren’t doing it already, you may be leaving a lot of money on the table.
According to a recent survey by Financial Engines, $24 billion in 401(k) matches go unclaimed every year.²
Yes, you read that correctly. $24 BILLION!
The survey also reported that the average employee misses out on $1,336 of free money each year.³
If you compound that over 20 years, that’s almost $43,000!
Whatever you do, contribute at least the minimum of what your company will match because it’s basically FREE money to you.
And, depending on what your company matches, it may double the amount of what you’re already saving.
Let’s say your company matched 100% up to 6% of your pay.
With a $55,000 salary, you could put in 6% or $3,300 for the year, and the company would match this at 100%.
That’s another $3,300 per year of free money that’s yours to keep!
This extra $3,300 doesn’t include compounding interest or your earnings.
This is just about the additional money you could be saving with your company match.
Rebalance Your 401(k)
If you want to stay on track to potentially maximize your 401(k) performance this year, make quarterly changes to your investments.
Rebalancing is the process of realigning the weightings of the assets (your investments) in your portfolio.
This can involve periodically buying and/or selling assets in the portfolio in order to maintain the initial desired level of asset allocation.
One reason many Americans aren’t regularly rebalancing their 401(k) is because they’ve been told to follow a “buy and hold” strategy.
They set up their 401(k) with their new employer, contribute each paycheck, and that’s about it.
Another reason might be that rebalancing takes time, understanding, and effort, so many people don’t bother.
And then there are investors 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.
Whatever the case, 80% of 401(k) investors fail to rebalance.⁴
To stay on track to potentially maximize your 401(k) performance, we encourage you to make it a point to rebalance your 401(k) quarterly–or four times a year.
A set-it-and-forget-it approach often causes investors to potentially miss out on earning more and keeping more of their hard-earned retirement savings.
Failing to rebalance may often result in more significant losses during bad markets.
Because unmanaged allocations may experience much larger losses in down markets and may miss the opportunity for growth during good markets.
24-hour news cycles and the rapid changes in marketing conditions, trade policy, and consumer sentiment mean 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.
When the investments you initially chose to help you meet your retirement goals are no longer the best alternatives for you now, it may be extremely advantageous to rebalance your retirement account based on your specific objectives.
Get Help Now
If you really want to stay on track to potentially maximize your 401(k) performance this year, seek professional help sooner rather than later.
A May 2014 study conducted over a 6-year period compared those who had help with managing their 401(k)s and those who did not.
The study revealed…
“On average, the median annual returns for participants in the study who got Help were more than 3% (332 basis points, net of fees) higher than people who didn’t get Help.”⁵
If you don’t think you have enough saved to warrant seeking third-party expert advice, or you think it won’t make much difference, take a moment to think about this…
You wouldn’t make major health decisions without the advice of a doctor.
So, why turn what could be your largest financial asset over to chance?
Check out our retirement calculator to see how professional help may improve your future retirement income.
- “Over 90% of Americans make this 401(k) mistake”, Mauri Backman, The Motley Fool
- AON Hewitt “Help in Defined Contribution Plans: 2006 through 2012” Published May 2014