A comfortable retirement does not happen by accident. One of the greatest retirement tools at our disposal is a 401(k). A 401(k) is a retirement savings plan into which employees contribute a portion of their pre-tax earnings. National 401(k) Day on September 7th serves as a great reminder to check in with your retirement accounts. We put together six tips to manage yours like a pro.
- Explore a Roth 401(k) Option – Contributions to traditional 401(k)s are made from pre-tax income meaning you pay tax at the time of withdrawal. A Roth 401(k), on the other hand, allows you to contribute after-tax income. Any withdrawals made at retirement are tax-free. A Roth 401(k) is attractive for those in lower tax brackets. Although your take home pay will be smaller now, your income will be tax-free in retirement at which point you may be in a higher tax bracket.
- Consider Automatic Rebalancing – Rebalancing periodically adjusts your portfolio back to the original asset allocation. Simply put, its primary purpose is to manage risk. Many plans offer the option to do this automatically on a quarterly, bi-annual or annual basis. Automatic rebalancing is a great way to keep your account on track and can help you capitalize on market downturns.
- Monitor Expenses – Paying minimally higher expenses over time can lower investment earnings due to compound interest. Fortunately, 401(k) management fees have come down drastically thanks in part to low-cost exchange-traded funds. Moving forward, keep an eye on your expense ratio (cost to manage your portfolio) to ensure you are not paying a higher-than-average rate on your funds.
- Roll Over Old 401(k) Options – If you have an old 401(k) from a previous employer you can either leave the money in the former employer’s plan, if permitted; roll over the assets to new employer’s plan, if one is available and rollovers are permitted; roll over to an IRA; or cash out the account value. The rollover options are preferable making it easier to organize your finances.
- Investigate Company Matching – Some companies will contribute to your 401(k) based on your own contributions. Typically, employers match a percentage of your contributions up to a specified portion of your salary or to a set dollar amount.
- Consider Increasing Contributions – Start by increasing your contributions by 1-5%. Next, set up annual 1% increases. A minimal increase will likely have a minor impact on your paycheck now and a major one on your retirement fund balance over time.
Disclaimer: Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual All investing involves risk including loss of principal.