401Ks Do’s & Don’ts

dosDo’s

Participate in Your Company’s Retirement Plan

Even if your budget is tight, try to start contributing at least just 1%. From there, you can monitor on an ongoing basis how much you may be able to increase your contribution into your retirement plan.

Start Saving Early

Compound interest will be your biggest proponent in reaching your retirement goal. Saving a little early and giving it as much time to grow as possible will likely be more effective than trying to save a lot of cash in a shorter amount of time.

Take Full Advantage of Your Company Match

Don’t leave free money on the table. If your company offers a match, take the steps necessary to be sure that you are getting the full match.

Raise Your Deferrals Every Year Until You Are Contributing at Least 15%

Research shows that 15% should be the target contribution rate to retire soundly at age 65. Although this may seem like a high number, this contribution rate doesn’t need to be achieved overnight. Try raising your contribution anywhere from 1-3% each year until you can reach the 15% target. If you are able to reach the 15% target at a faster rate, then all the better.

Have a Strategy

Blindly throwing money into your retirement plan and hoping it grows is not a diligent way to save for retirement. Develop a plan specific to your needs and retirement goals and stick to it.

Have a Monthly Retirement Income Goal for Your Target Retirement Age

The true goal of a retirement plan is to create an income replacement vehicle for when you are no longer working. By determining what your monthly income need will be in retirement, you can develop a plan centered on that goal.

Stay Focused on Your Monthly Retirement Income Target, Not Quarterly Statements

The first item you will likely see on your quarterly statements is your rate of return, and that is because our industry has done a poor job of expressing the real importance of a retirement plan: reaching your monthly retirement income goal. Keeping a long-term approach and view of your account, while focusing less on the short-term returns, is key. Develop a plan to reach your retirement income and stick to it.

Understand your Risk Tolerance

Every investor is different, and every investor has different targets for their retirement income. Figure out what your risk tolerance is and how that affects what actions you will need to take to get to your target monthly retirement income.

Diversify Your Portfolio According to Your Risk Tolerance

Understand what your risk tolerance is and allocate your portfolio accordingly.

Don’t Panic When the Market Drops

The biggest mistake investors make is running for the hills when the market has a downturn. Although most have heard of the mantra buy low, sell high, emotions have a way of getting the best of people. Remember, you haven’t actually lost anything until you sell.


dontsDon’ts

Don’t Be Afraid to Ask for Help

Your employer and 401k provider often times have many resources available, and your plan may have an advisor that is hired to help employees. Utilizing these resources will help make sure you are on the road to retirement.

Don’t Let Headlines Affect Your Long Term Retirement Goals

Headlines can lead to investors making rash and quick decisions, i.e. the recent Brexit event. Although these headlines and events can result in short term effects on the market, keep in mind that your retirement plan investments are for the long term and should not affect your strategy.

Don’t Listen to Coworkers

As mentioned above, every investor is different and thus should have their own strategy to reach their goal. There will always be someone (whether it’s a coworker, friend, etc.) who will tell you about how great their investment strategy is, and it very well may be the best for that person. But keep in mind that you are your own investor, and thus, you have your own investment strategy that will likely differ from others.

Don’t Focus on Quarterly Returns

Again, this is a long term account, and quarterly returns paint a very poor picture of a long term account. Having a sound investment strategy and long term approach will be the keys of getting where you want to go.

Don’t Take a Loan Unless it’s an Emergency

Too many times we have seen participants treat a retirement plan like a checking account, taking a loan for an unnecessary purchase. Not only will your loan amount no longer be invested (thus losing out on potential earnings), but if you were to leave your job, that loan would be become payable and taxable. Certainly there are emergencies when a loan is a last resort and must be taken. But other than an emergency, try to avoid taking a loan from your retirement plan.