To stay on track to meet your retirement goals, it’s important to make a regular habit of reviewing your 401(k) portfolio. This helps ensure that you’re putting enough aside and that you have the best mix of investments to meet your financial objectives. If you haven’t reviewed your 401(k) lately, there is no time like the present.
When to Review Your 401K
At minimum, make sure you’re reviewing your 401(k) annually. Many advisors recommend quarterly reviews. More frequent review becomes important when markets are volatile, as they have been since the beginning of the COVID-19 crisis. During times of economic volatility, portfolios can quickly become unbalanced as assets quickly lose or gain value.
A target-date fund is automatically reviewed and rebalanced each year, based on your projected retirement date. Many 401(k) investors find this low maintenance option appealing: in 2020, more than half of them had all of their 401(k) assets in a target-date fund, and more than three quarters used a target-date fund for at least some of their investments.
Even if you’re invested in a target-date fund, now is a good time to take a close look at your portfolio. These funds typically increase the proportion of bonds and other fixed-income investments as investors get closer to retirement age. Because 2020 has brought historically low interest rates, many automatic allocations may now be too conservative. The old rule of thumb was to subtract your age from 100: the result is the percentage to invest in securities, with the rest going into lower risk, lower return investments. Today, however, many of these “safe” investments fail to deliver yields that outpace the rate of inflation.
If you’ve been relying on the automatic allocation and rebalancing of a target-date fund, now could be a good time to revisit your strategy. If you’re nearing retirement, a fiduciary investment advisor can help you identify investments that can protect your wealth while avoiding unnecessary risk.
What to Consider When Reviewing Your 401K
To get the most out of your retirement fund, you should look at several factors when reviewing your 401(k).
How much are you currently contributing to your 401(k)? Did you actively choose that amount, or did you simply go with the default amount that the employer set when you enrolled? Often, employers take just 3% of pay as a default automatic deduction for 401(k) contributions. Generally speaking, this is not enough for most workers to build a sufficient retirement nest egg. Make sure you’re putting enough of your income into your investments to realistically reach your goals.
One factor to consider when deciding how much of your pay you should be contributing to your 401(k) is how much your employer will match. Many employers match 50% of employees’ contributions of up to 6% of their income. When setting your contribution rate, make sure to take full advantage of the matching funds your employer offers.
On the other hand, you’ll want to make sure you’re leaving yourself enough income to meet your short-term needs. Make sure to cover these bases before you allocate more to your 401(k):
- Have emergency savings sufficient to cover at least three months of expenses.
- Pay off high-interest credit card debt.
- Make sure you have adequate medical insurance.
- Especially if you have dependents, make sure life insurance is in place.
Keep an eye on the fees you’re paying for your 401(k). It’s possible that after you’ve taken advantage of the maximum employer match, your money may go farther in another fund such as a traditional or Roth IRA. Not only might you enjoy lower fees, but IRAs tend to offer a wider variety of investment choices, giving you greater control over your money.
Careful asset allocation allows you to create the appropriate balance of risk and opportunity for growth while diversifying into different classes of assets to reduce the overall risk to your investments. As mentioned above, it’s generally advised to decrease risk in a portfolio as the investor draws nearer to retirement age. In light of today’s extremely low interest rates, however, it’s important to ensure that you’re not losing money by keeping large amounts in investments that return less than the rate of inflation.
When markets experience volatility, asset allocation can quickly get out of whack. 2020 was a year that no one could have predicted, and 2021 holds an immense amount of uncertainty. As long as the future remains uncertain, keeping a close eye on your 401(k) will allow you to chart the best possible course through the financial fog.
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