Which is better for you?
Going to the Doctor when you are sick or going to the Doctor regularly for preventive checkups and maintenance?
Just like everything else in your life it is always better to be proactive versus reactive. Being proactive in retirement means getting the most from your 401(k) plan retirement plan.
These are my FIVE Steps for participating in and having a successful 401(k) whether you are a participant or the company administrator/fiduciary.
STEP 1 – Get the most from your 401(k) Plan.
Many of us know the story of the slow tortoise winning the race against the fast hare. The same applies to your 401(k). Let’s compare Slow Sue to Fast Fred. Slow Sue saves $5,000 per year for 30 years for a total of $150,000, earning 8% per year. Fast Fred delays contributions for 15 years, but contributes $10,000 for 15 years for a total of $150,000 and also earns 8%. When they retire on the same day, Slow Sue has $625,000 while Fast Fred has $290,000.
The earlier you get started, the better off you generally are
STEP 2 – Maximizing Your Contributions.
n 2016, employee contribution limits are $18,000 per year if you are under age 50 or $24,000 if you are age 50 or older. Maximize your contributions within your budget. The annual contribution limits are a one shot deal. You can never tell your employer, ‘my finances were tight last year so I skipped my $18,000 contribution – just double it to $36,000 this year.’ Each year is a use-or-lose-it opportunity.
If you are just starting your employment or starting to save, save as much as possible. In my steps to becoming a Financial Olympian, I recommend that you start with 5% and add 1% each year until you reach the maximum.
STEP 3 – The Company Match
Many employers offer a match to your contributions. For example, many employers will match $1 of your savings by contributing $1. This is like a 100% return on your investment.
Clearly understand if your employer’s contributions vest immediately or if they vest over time (e.g.: 20% vesting per year over five years). Clearly understand when your match will occur. If your match vests immediately and is made each time you make a contribution, you have less at stake if you transition to a new employer in the middle of the year. If your match vests at the end of the year and your employer matches at the end of the year, you have more at stake with a middle of the year transition to a new employer.
STEP 4 – Maximizing Your Risk-Adjusted Return.
Many of us have heard the rumblings around the water cooler:
‘You can’t lose money in gold, so put all your 401(k) money in the gold fund’ or ‘Real estate never goes down, so put all your 401(k) money in the real estate fund.”
So, which is it? Probably neither. First, you have to know what your risk score is? What are your investing goals & what is your actual risk tolerance? These are the two largest components that dictate how you should invest for your future.
Are you like many investors who fail to consider the risk your portfolio holds? Chances are you’ll find yourself making irrational, emotional decisions that negatively impact your personal success.
Using our Riskalyze tool, our clients know that we invest their money to meet their Personal Risk Tolerance. Find out your Risk Score now!
STEP 5 – Professional Management.
Portfolio management of your 401(k) is not for the faint of heart. For example, the average equity investor’s average annual return for the 20 years ending December 31, 2014, was 5.19%. This compared with a 9.85% average annual return for the S&P 500 equity index for the same period according to the 2015-DALBAR-QAIB-study.
The primary culprit for the weaker performance was the poor timing of the market. The average investor sells during downturns and buys back “when things look better”. With so much at stake, have your 401(k) account professionally managed by an Accredited Investment Fiduciary (AIF)
Take Action Now
Start contributing early, maximize your contributions and your employer match, understand what your real risk score is and have your 401(k) account professionally managed
To schedule a time to speak with me, please click on MY CALENDAR
Michael Tannery CPA CDFA™ AIF® ● CEO