Most people realize that they should be contributing to a 401(k). However, most people don’t know how to manage their 401(k). We don’t know it all, but we definitely enjoy reading about it. After all, it is our own money!!! Here are a few easy rules to keep you on the right track:
- Start saving as early as possible —Time is on your side when it comes to the power of compounding interest. Even if you’re not able to contribute a lot at the start, every little bit helps.
- Location, location, location—When it comes to investing, don’t put all your eggs in one basket. You want a diverse portfolio but don’t overdo it. Three or four funds should suffice.
- Remember Enron—The lesson we all should have learned from that disaster is to limit the amount of funds you have in your company stock. As a rule of thumb, don’t hold more than 25% of your portfolio in your company stock.
- Less is more—Resist the urge to constantly tinker with your 401(k). Once you’ve chosen an asset mix, only rebalance your portfolio once a year. Any more than that and you risk chasing yesterday’s winners.
- Cash isn’t always king—If you change jobs, don’t cash out your old 401(k). If you’re happy with your portfolio, leave the 401(k open. If you’re not happy with it, your best bet is to roll it into an IRA. You will avoid taxes and withdrawal penalties as well as have more options and flexibility.
- Leave the loans alone – While it may be tempting to take a loan from your 401(k), this can be a risky move. If you leave the company before you have paid back the loan, the full amount will be due. If you don’t have the funds, expect to pay a 10% penalty and be taxed on the outstanding loan amount.
- Fees add up – If you read the prospectus for the funds offered in your 401(k), you should see something called expense ratio or similar. This indicates the percentage of fees you pay for owning that fund. The numbers will usually be small, such as 0.75% or 1.5%. It may seem inconsequential but it isn’t. As little as 0.5% difference in fees can add up to thousands of dollars you WON’T have during retirement. When choosing your funds, be sure to beware of the fees.
- Don’t be afraid to ask for help, but ask for the right kind – Many plans offer advisors to assist your with your allocations. While this may be a good option for some, beware of fees again. Don’t accept help that is based on a percentage of your assets. This is just a way for an advisor to continue to make money off you. Look for a fee-only advisor. This way you know what you are paying and it should be a one-time fee, not ongoing payments.