Does your New Year’s resolution for 2016 resonate of “new year, new me”? Whether you have actually followed through with your resolutions or not, you should add one that requires a little effort now with a potentially large reward down the road. Give your 401(k) a checkup!
Your 401(k) or other retirement account is a key factor in determining your future financial security. There is no better place to save for retirement. Your annual contribution amount and the investments that you choose could determine your retirement lifestyle.
Contributions
Before diving into the investments, first look at your contribution level. Review your end-of-year statement to see how much you contributed in 2015. Ask yourself the following:“Did I take full advantage of the match offered by my employer?”
If not, you missed out on free money! If you made this mistake, don’t repeat it in 2016. Make a commitment to get your contribution at least to the level that allows you to receive the full employer match.“Was there extra cash left after meeting my monthly budget?”
Reflect on your cash flow in 2015. If you have extra money, put it toward securing your family’s future instead of spending it now. Set a goal for 2016 to increase your retirement plan contributions and get to the maximum as soon as you can. The 2016 dollar limit for contributing to 401(k), 403(b), and 457 plans is $18,000 ($24,000 for participants age 50 and over).
Investment Allocation
After determining your 2016 contribution amount, review the overall investment allocation, i.e. the amount in stocks, bonds, and other categories. To determine the appropriate allocation, it is important to know your time horizon and risk tolerance.If you are just beginning your career and starting your retirement account, you will likely have 30 plus years until you need the money. In this case, you should be willing to take on more short-term risk, which offers a better long-term growth opportunity. Historically speaking, the stock market provides the long-term growth you should be looking for. However, its value can fluctuate greatly over the short-term. So patience is required.
If you are nearing retirement age, the short-term risk of an aggressive stock allocation could have a negative impact on your retirement spending capacity. There is nothing more devastating than a stock market decline right before or after you retire! Rule of thumb: Never invest money in the stock market if you will need to spend it within the next five years.
Your allocation may need to change several times before you reach your desired retirement age. Therefore, during your 401(k) checkup, it is important to review your allocation and make any changes in your investment mix that will ensure your portfolio is positioned to get the results you want.
Investment Options
Your 401(k) checkup should include a review of the portfolio’s investment performance. Most employer-sponsored retirement plans offer a list of mutual funds for you to choose from. The plan may also include “choose and snooze” options that are intended to automatically change your allocation to reflect the proximity to your retirement age. It is important to review every investment, regardless of type.Mutual Funds
The investment return of each mutual fund compared to an index return is generally available on your 401(k) website. While is it not advisable to “chase return” by moving to the fund that had the best performance over the last quarter or even the last year, it is important to gage your fund’s performance over the longer-term and make changes that are appropriate.
Target Date Funds
These investment options are “choose and snooze” funds. Just as mutual funds are a basket of individual securities, target date funds are a basket of mutual funds. These funds can be a convenient one-stop-shop for participants who prefer to have the fund make their allocation changes automatically based on the “target date”. For example, a 2050 target fund (appropriate for a 30 year-old wanting to retire at age 65) will change its allocation from aggressive (more in stocks) to less aggressive as 2050 approaches. While this may be an easy option, be sure you agree with the allocation and its scheduled changes. And, just like the individual mutual funds, it is important to review the fund’s overall performance.
Summary
Take time now for your 401(k) checkup. If you are maximizing your contributions to your retirement account and ensuring it is allocated appropriately with funds that are performing well, you will be amazed at how much better you will feel when it comes time to retire!Prior to implementing any investment strategy referenced in this article, either directly or indirectly, please discuss with your investment advisor to determine its applicability. Any corresponding discussion with a Bedel Financial Consulting, Inc. associate pertaining to this article does not serve as personalized investment advice and should not be considered as such.