To ensure that you remain on track to meet your retirement goals, you must regularly review the investments in your 401(k) or other retirement account. Regular review enables you to make necessary adjustments to your portfolio as your means, needs, goals, and the value of your investments shift over time. Here are six tips to keep in mind when reviewing your 401(k).
The mix of equities, bonds, cash equivalents, and real estate and real estate alternatives should be carefully chosen based on your age and time horizon (the number of years before you wish to retire), retirement goals, and appetite for risk. Generally speaking, investors with longer time horizons should have a higher proportion of equities, while those closer to retirement need a greater share of lower-risk investments. When you review your 401(k), this is an opportunity to restore the appropriate balance among asset classes.
In addition to keeping balance among asset classes, making sure that you’re investing in a diverse selection of industries and companies will provide your 401(k) a degree of protection against market volatility. When you invest in a wide array of industries and types of companies, you increase the odds that at least some of your assets will perform well at any given time.
For a well structured retirement portfolio with judiciously chosen investments, annual to quarterly review is generally sufficient to keep things on track. During times of market turbulence, however, it can be beneficial to check in more often. Volatility can cause individual investments to gain or lose value quickly, causing imbalance in your portfolio. For example, if you purchased stocks immediately following the 2020 market crash, it’s likely that they have appreciated a lot, causing the value of the equities portion of your portfolio to grow out of balance with bonds and cash.
401(k) fees are not always easy to spot, but they can take a significant bite out of your investment returns. Plan fees can range from 0.5% to 2.0%, with larger plans generally offering lower fees than smaller ones. Fees should be a key factor when determining how much to contribute to your 401(k).
The portion of your income that you should allocate to your 401(k) can change over time. If you never really considered how much to contribute but just went with your employer’s default amount, then a 401(k) review gives you the opportunity to look critically at this variable. Often, this default amount isn’t enough to take full advantage of employers’ matching contributions, let alone provide a comfortable retirement. Make sure you understand how much of your contributions are eligible for employer matching funds, and if feasible, contribute at least that amount.
A trusted and knowledgeable advisor can help you establish an appropriate portfolio balance and choose a diverse selection of investments. They can help you understand the fee structure of your 401(k) and determine the ideal amount for you to contribute. In some cases, it may be most beneficial to contribute less than the maximum allowed and put more of your income into other types of investments.
Registered investment advisors are held to the fiduciary standard, a legal requirement to put their clients’ interests ahead of their own. Investment brokers, on the other hand, are required only to make recommendations that are “suitable” for their clients’ circumstances, needs, and goals. When you work with a fiduciary, you can be assured that their recommendations are aimed solely at securing your financial future—not theirs.
WRP provides complete wealth management, including investment, retirement planning, tax, and more. For more insights to help you reach your financial goals, browse our blog!