Is My 401(k) Okay?

Is My 401(k) Okay?



By Anthony Glomski



If you are currently employed, your employer may provide a retirement plan in the form of a 401(k). A lot of confusion exists in what it is and how it really works. A 401(k) is a type of retirement savings account and is also considered a qualified plan in the eyes of the IRS.

Personal Finance

This kind of retirement plan is also referred to as a defined contribution plan. What do i mean? Well, the part that is known, or defined, will be the contributions going into your plan. This can be made up of money you set aside from your paycheck and any portion that your employer may contribute on your behalf. What isn’t defined is how much you will receive at retirement. And so the decisions and actions you're taking today, can have a important effect on your lifestyle down the road.

In the past, the more common type of retirement plan was called a defined-benefit plan. We often think of these as the classic pension plan. After a certain number years of service, you would be entitled to receive an exact amount paid monthly, usually for the remainder of your life. Sadly, the cost of those plans got high. The 401(k) was seen as a better alternative and additional giving people more choices and latitude with their investment.

The key in your success can be maximizing the total amount of money saved in your 401K. Just how do i do this? The following simple steps can help.

Maximize Your Contribution. Please.

The thing to realize about the 401(k) is the government wants you to definitely save for retirement, and provides three nifty incentives:

Tax deferral on all contributions

Tax deferral on any gains on your investments

And, if your employer is generous, they might contribute to your plan and the government will defer any taxes on these contributions until retirement.

Exactly what does this mean? It is generally in your best financial interest to put in the maximum amount into your 401K. “But I'm stressed and not i can afford it.” I’m not sure you can afford to refrain from giving it. Imagine later in life with little or no retirement savings. In my experience, that is a far more stressful thought. Also, get real with what contributing means. Let's assume you elect put $100 in your 401(k) each pay period. Based on your tax bracket, in fact your net paycheck may be reduced by $80 (perhaps even less). Let’s say your employer provides a 100% match. That means $200 will go into your 401k each pay period. Is there a reality? You are taking home $80 less in substitution for $200 toward your retirement. Seems like a fair deal to me. Make an effort to contribute to the point at which your employer will match. Even better, contribute the absolute maximum allowed underneath the law.

Make The Right Investment Decisions.

Can be your retirement money properly invested? In most cases, there will be an investment adviser or broker who works together with the retirement plan. They may be responsible (in most cases) to offer education about your plan and investment options.

“Where is this person? I’ve never seen them.”

Reach out to your human resources department and find out who's responsible for the 401k within your company. They will have the contact info for this person. Also, request an “enrollment booklet” for the plan. This typically offers some helpful advice and will list ignore the options.

If you don't necessarily possess the time or the knowledge regarding how to manage investments, there could be an easy solution. Many 401(k)s includes the option for “lifecycle” or “target retirement” funds. This fund ought to be matched to your expected retirement date. Let’s say your retirement is Two decades in the future. You would select the fund that is dated on around 2030.

This fund usually has a diversified mix of stocks, bonds, cash, etc. When you grow older, the fund automatically rebalances itself in an attempt to take less risk. The share of bonds versus stocks steadily increases as time passes. The closer you might be to retirement, the more bonds you should have within your portfolio. The target retirement fund automatically does the work for you. So, if you are a little unsure on how to navigate the investment world, think about the target retirement fund.

Look out for Those Fees.

FINANCIAL ADVICE - A bit known item checked out by very few individuals are the expenses you pay within your 401(k). These are automatically deducted from your bank account, and often times it’s extremely hard to ascertain how much you are being charged. “Does an extra 1% matter?” Absolutely! Paying another 1% over 20 years can lead to you retiring with 20% less overall.

After you review and determine your investment options, do a little research and find out a few of the fees being charged. Morningstar.com is a wonderful resource. Enter the ticker symbol to your investment, and look at the “expenses”. Anything above of 1.5%, in my opinion, is excessive. You might like to speak to the retirement plan administrator at the company about including inexpensive options in the 401(k). Also, search this year for “fee disclosure”. This will tell you exactly how much you might be being charged in total fees in your 401k. If it seems high or excessive, consider asking your employer should they have investigated other options.

Knowledge is power. Hopefully reading this you have a a bit more knowledge about your retirement plan. It is now up to you to act. Keep it simple and focus on the three summary sentences above. This can dramatically change your retirement years for the better. Please don’t forget to permit yourself to feel good about making positive modifications in your life.

Personal Finance

Anthony Glomski is the founder and principal of AG Asset Advisory, an authorized Investment Advisor that are experts in high net worth individuals and retirement plans for small enterprises.
 

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