Setting up and contributing to a 401(k) is kind of a no-brainer, especially if your employer provides company match and direct contribution from your paycheck. All you have to do is enroll, choose how much to contribute, and select your investments; it is plug and play retirement planning at its best.
But once you have a retirement plan in place, what kind of maintenance does it require?
Set It and Forget It
401(k)s are attractive because they are a simple and easy way to save for retirement. You can choose to pay the tax now (the Roth 401(k) option) or pay the tax once you start drawing on it (the Traditional 401(k) option). “Set it and forget it” means setting up a retirement plan and no longer paying any attention to it until you need it.
Is this a good strategy for managing your 401(k) or should you take a more active role? Let’s take a look at the pros and cons.
● It’s automatic. Signing up with your employer and having them deduct the amount you designate straight out of your paycheck allows you to not have to think about it, or remember to do it, every paycheck. Your company does the paperwork and sets up the payments.
● You save time. Having a full-time job, along with caring for your family and personal life, takes time and energy. You may not have the extra oomph needed to research how to make the most of your investment portfolio. Most employers have several preset investment options to choose from that are geared to yield good results.
● You benefit from the knowledge of others. Letting an investment advisor with the experience and wisdom direct your retirement plan allows you to benefit from someone else’s expertise. This is helpful especially if you are a novice investor or do not enjoy tracking the ins and outs of various investment options.
● Orphan accounts. Most Americans will change jobs several times in their adult life, leaving behind a retirement plan with their former employer. Over a thirty year span, this could mean several little orphan retirement accounts left unattended. As of 2021, there were nearly 25 million forgotten 401(k) accounts over the years in the U.S. That results in lost retirement income for you.
● Missed opportunities. Incomes, lifestyles, and needs change over time. You can tailor your retirement plan to suit whatever stage or income level you are currently in. By not taking the initiative to review your 401(k) contribution amount and mix of investments, you could be missing out on building up your nest egg even more.
● Lost earnings. If you are over 50 years old, you are allowed to contribute more to your 401(k) to catch up to where you need or want to be in your plan. If you set it and forget it, you may lose out on those extra earnings.
Like your car, your body, and your relationships, your retirement plans require some kind of regular maintenance. Show your 401(k) a little love and attention by taking these steps:
● Check on it. Take time to visit your 401(k), just like how you choose to visit your doctor, at least once a year.
○ If your contributions are automatic paycheck deductions, make sure those are happening. True story: I knew someone who missed several months because of a company payroll error.
○ Have you changed jobs a few times? Depending on the options available, you might want to simplify and roll all your retirement accounts into one.
○ If you’ve had a major life event like a marriage, divorce, or birth of a child, be sure to update your beneficiaries.
● Increase giving. As your income changes, so should your contribution amount.
○ The amount you could afford to pay into your 401(k) as a company new hire will differ greatly compared to the amount you can contribute now that you are in senior management. Upping the dollar amount per pay period is an easy adjustment. The goal is to start deferring 15% from your paycheck.
○ Once your student loans or credit card debts get paid off, you can earmark that money to increase the amount you are devoting to your retirement. Incremental additions over time can snowball into big returns, thanks to compound interest.
○ If you are over 50 years old, you can take advantage of the “catch-up” contribution and throw in an extra $6,500 per year.
● Rebalance. One-third of those who have a 401(k) have admitted they don’t rebalance their retirement plans.
○ Rebalancing your portfolio simply means adjusting the mix of stocks, bonds, and whatever else you have. If one element has done well and another has not, you can reallocate and shift your money accordingly.
○ Your financial situation and life goals change as you move from your 30s to your 40s, 40s to 50s, and so forth. The closer you get to retirement age will determine the mix of investments you want in your 401(k). It’s important to rebalance your 401(k) mix to match your current needs.
If you’ve taken the action to put a 401(k) in place and are contributing regularly, your retirement account is going to grow. Regardless of whether you “set it and forget it” or keep an eye on it, the good news is you have a plan! However, with a little bit of time and attention, your 401(k) can yield bigger returns. Taking a few extra steps will provide you with more income that you can enjoy in retirement.
Written by Matthew Delaney