Managing a 401k is not at the top of most people’s list of things to do. Yet, it should be. A 401k will likely be the largest part of your future financial security. Most people would agree with that statement but the problem is: How do you manage a 401k?
While there is a lot of information available on how to manage a 401k, the truth is most will simply not read it. Why? Time and lack of confidence. People are busy and tinkering with a 401k seems worse than just leaving it alone. After you setup your 401k, chances are you never look at it. By spending time to learn how to manage your 401k, you can get onto the road to getting the most out of it and your retirement.
This article will provide you with a cheat sheet of five tips to consider in bettering your 401k. Hopefully with this guide you can invest with confidence and start building wealth for the future.
1. General Guidelines
According to the Retirement Confidence Survey, about 26% of respondents said they had less than $1,000 saved for retirement (not including pension or home values). A whopping 64% had saved less than $50,000, as noted by The Motley Fool.
Consistently contributing to your 401k is a must, especially if there is a company match. A company match is basically free money. Grab it! Once you are contributing, try to max out the company match. Once you’ve done that, go for the maximum annual contribution.
In general, the younger you are, the more your portfolio allocation should be slanted to stocks. With 30 plus years until retirement, you can weather any volatility. As you begin approaching retirement, your portfolio allocation will consistently move into more conservative investments.
Keep in mind that many factors are affecting a portfolio’s allocation. Time horizon is only one. Speaking with a financial advisor can help you sort out the details and choose an allocation that is right for you.
Check out our guide to investing in your 20s for more info on a good allocation.
2. Improve Your Investment Knowledge
Improving your retirement investing knowledge is always a great choice. We have some amazing resources here to get started. Check out our guide to how to start investing.
If you're looking for a little more info, here are a few good books to get you started:
3. Target Date Funds
Target-date funds are a type of set-it-and-forgot investment. Nearly all 401k plans offered by employers include target-date funds. Some companies even set them as the default so employees begin contributing as soon as their account is open.
A target-date fund is named with is target year. This is the year you expect to retire. The fund automatically adjusts its allocation as you get closer to retirement. Target-date funds can be a low maintenance choice for investing in your retirement.
It can be hard to pick an exact year, as these funds usually are named in 5 year intervals. You can make a choice to choose a year a little before you expect to retire - this being a little more conservative in your investments, or a little after you expect to retire, being a little more aggressive.
Target date funds are the solution for everyone, and there are problems with target date funds you should be aware of.
4. Find A Financial Advisor
Financial advisors can provide some of the best and most comprehensive options when it comes to retirement investing. While using a financial advisor is costly, there’s a chance the fee will make itself up in portfolio growth.
Financial advisors can benefit investors at all levels. Beginners who are unsure about what they should do and don’t want to spend time learning about retirement investing will benefit by visiting a financial advisor and perhaps being put into a long-term investment plan.
A financial advisor will want to understand your entire financial picture, which may not be the case with robo-advisors. They can also answer any questions you might have and take into consideration new life events. For example, a newborn, a new home, moving or whatever it might be. All life events can potentially impact your retirement investing plan.
While there aren’t many tools available to help with 401k management, Blooom finds itself in a unique situation as being one of the only tools available in the space.
Bloom analyzes your 401k account and provides suggestions on how best to optimize it. Blooom is like a robo advisor but there are real financial advisors who can help as well. To use Blooom, you first set a few basic parameters such as your risk tolerance and time to retirement. Through the use of a flower that grows or dries out, you’re able to see how optimized your investment parameters are.
In addition to helping with portfolio optimization, Blooom looks for hidden investment fees. Some of the suggestions it could possibly make based on its findings include:
- You have the wrong mix of stocks and bonds based on the number of years until you retire.
- You could have better diversification (that’s fancy schmancy financial talk that basically means you could reduce risk/volatility).
- Yikes! You’re paying around $298 a year in hidden investment fees (hypothetical suggestion/finding)
Blooom can also answer pretty much any financial question you have - from paying off student loans to other options to save for retirement outside your 401k.
Blooom doesn’t do any type of automated trading in your 401k or other accounts. Instead, it provides suggestions and allows you to then perform any trades. The service cost $10/month. You can read more about Bloom at https://www.blooom.com. Check out our Blooom review here.
Saving for retirement is critically important and getting your investments right is the next step. You don’t have to be a Wall Street Pro to get retirement investing right. By increasing your knowledge and taking action, you can ensure you’re ahead of most people in getting the most out of your retirement investing.
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him on the About Page, or on his personal site RobertFarrington.com.
He regularly writes about investing, student loan debt, and general personal finance topics geared towards anyone wanting to earn more, get out of debt, and start building wealth for the future.
He has been quoted in major publications including the New York Times, Washington Post, Fox, ABC, NBC, and more. He is also a regular contributor to Forbes.
Editor: John Frainee