By Greg Hart, CFP®
When it comes to saving for retirement, you want to use all the resources available to you. One such resource many Americans have access to is a 401(k). A 401(k) is a valuable and important tool with many benefits to help you build your nest egg, but like most things, it’s how you use it that matters. And in this case, what you do to minimize risk can make a significant difference at the end of the day. Here are 5 ways to do just that.
1. Choose The Right Investment Mix
401(k) values typically rise and fall with the stock market, meaning they don’t offer protection from losses. If the stock market does well, so does your 401(k). But if it drops, so will your retirement account, no matter how soon you need the money.
Diversification is the key to reducing risk in your 401(k). Don’t put all your money in a few companies. Instead, spread your money out over hundreds of companies to lower your chance of losing money in the long run.
This is why you should also consider rolling over old 401(k)s. If you’ve switched jobs and have multiple employer-sponsored accounts to your name, each of these accounts could have different portfolio mixes and risk levels. If possible, roll over these accounts so you can get a clear picture of your current investment strategy.
Then choose a portfolio mix based on your current age and financial goals. For example, if you’re in your 20s and just getting started with investing, you may choose a moderate portfolio with 60% stocks and 40% bonds. If you’re nearing retirement, you may want a more conservative portfolio with 50% stocks and 50% bonds.
2. Watch For Fees
If you thought you didn’t pay fees in your 401(k), you’d be wrong. Fees vary based on the type of retirement account you have, but they can easily eat up a large part of your return. Some of these fees may be obvious, while others may be hidden. Common fees include fund expenses that can be upwards of 1% or more per year such as: transaction fees, bookkeeping fees, and finder’s fees, to name a few. Choose investments with lower fees so you can keep more money in your own pocket for retirement.
3. Don’t Play The Market Game
Most active traders garner the lowest returns. Between 1992 and 2006, 80% of active traders lost money, and only 1% of them were profitable. (1) The takeaway? Don’t try to time the market. You’re guaranteed to fail. Instead, invest for the long term and keep contributing to your retirement account every month. If needed, rebalance your account at most quarterly with only minor adjustments. There’s no need to do any more than that.
4. Be Proactive
Most companies enroll their employees at a 3% contribution rate, but 3% will not get you to your retirement goals. Likewise, many plans choose allocations for you, but since they don’t know your goals and your values, are those really the best choices for you?
It’s all too easy to just “set it and forget it,” deciding how much you want to contribute, choosing an allocation profile, and hoping for the best. But in a matter of a few years, you may realize that your account no longer reflects your risk tolerance, time horizon, and planning needs. Take the time to create a 401(k) strategy, check in with your account to rebalance, and increase your contribution rate as your financial situation allows.
5. Get Personalized Advice
Retirement plans are confusing because there are so many options to choose from. Unless you’re an investment pro, you may unintentionally choose options that aren’t diversified and aligned with your goals. Protect your future retirement dollars by seeking help from a trusted financial advisor who takes the time to get to know you and what you want out of life.
At Haddon Wealth Management, we want to help you take care of the details so you can go back to doing what you love best while still having confidence in your future. We do this by helping you optimize your benefits and understand how your 401(k) works. To get started, call us at (856) 888-1744 or contact us online to schedule a complimentary get-acquainted meeting.
Gregory M. Hart, CFP® is the founder and managing director of Haddon Wealth Management, LLC, a registered investment advisory firm that provides comprehensive wealth management (in-depth financial planning and sophisticated investment management) for clients who value a relationship-driven approach that delivers customized solutions. Based in Haddonfield, New Jersey, Greg works with clients throughout the Delaware Valley, as well as nationwide. To learn more, connect with Greg on LinkedIn, visit our website at www.haddonwealthmgt.com, or call (856)-888-1744 to begin a discussion.