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10 Tips to a Better 401k Investment Strategy

| February 19, 2018
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Pittsburgh Retirement Action PlanTo retire comfortably, you need to make the most out of your employment years to increase your 401k investment. That is why it is essential to find ways to increase your savings without putting it at risk. There are definite do’s and don’ts to increasing your investment portfolio, but not all of them are obvious. With so many people making recommendations based on the latest trends and fads, you want suggestions that are a bit more reliable

 The following are 10 things you can do to help improve your current 401k investment strategy so you can retire in comfort.

1. Start on the First Day

Most businesses will let you start adding to your 401k within a month or two of employment; some will even let you start saving during your first month. If your employer offers a 401k, add to it, even if the company doesn’t match your funds. Too often, people postpone starting their retirement savings until they are well into their professional careers, and that could end up being a significant problem later.

If you change jobs, find out if the new job has a 401k program and start adding to it.

It does not matter if you can’t put much away in those early days. The point is that you will have more opportunity to get a much greater return on what you do add in the beginning than on a larger amount 15 years before you retire. Even if you are only putting away $25 a month, that is still $300 a year. If you are 23 years old, that $300 has nearly your entire career to earn interest. Taking compound interest into consideration, you can maximize that interest by putting away even little amounts when you are young.

2. Maximize Any Matches

If your company has a matching program, make the most of it. You should check to see if there is a matching program in effect because it could mean doubling your 401k over the years. If your employer matches your contribution up to 5%, that money is free money for your golden years. Too often, employees fail to make the most of the matching option, using only a small part of it. If you can, try to add the maximum amount of the matching funds so that you can maximize your returns. Like starting your 401k from the first day, whatever is matched early on will have a lot more time to grow too – and the matched contribution will not cost you a dime.

3. Contribute as Much as You Can Afford

In the beginning, you probably weren’t able to meet the maximum matching value, or the maximum amount to save on taxes – and that is fine. The problem is that too many people don’t update that percentage as they advance in their careers. Don’t get complacent. You need to remember to update your contributions when you get a raise. If you get a windfall (whether through a company  providing a bonus or through something in your personal life, such as an inheritance), put as much as you can into your 401k. By adding more money when you can, you will be making your retirement that much more comfortable.

4. Get the Most out of the 401k Tax Break

Every year, you are allowed to add to your 401k without having to pay taxes on that money. You even get a little extra time to do that into each new year. This is to encourage you to save as much as possible while you can. By saving the maximum amount that is pre-tax, you are maximizing both how much you will have in retirement and how much you will owe in taxes each year of retirement. You will have to pay taxes on the income when you start taking it out, but you will likely be in a lower tax bracket, which means paying less in taxes after you retire.

5. Wait to Be Vested

It is easy to get frustrated or fed up with a job and want to move on, but if you can stick it out until you are fully vested, the returns on that investment could be significant. Employers who are willing to match a 401k will not make all of that money available to an employee if that employee does not put in the time needed to qualify for it. You will receive a percentage of the match for each year you work, until you reach their required number of years to be vested. Find out the number of years required to be fully vested with your employer, then stick it out before looking for something else or before you retire.

6. Rollover – Don’t Cash out

If you change jobs, regardless of the reason, try to rollover your 401k instead of cashing it out. Find out if your new employer has the option to join their 401k program and rollover your 401k, and if it is possible consider doing it. If your new employer does not have that option, see if you can roll it over into a Roth IRA. If you are unemployed or self-employed, consider rolling it over into a Roth IRA instead of cashing it out. You may lose a large chunk of money by cashing out because 401ks are not meant to be treated as savings accounts. To deter people from cashing out, there are steep penalties for cashing out.

5. Diversify Your 401k Investment

One of the best ways of making the most out of your 401k is to diversify it. Being cautious is great, but nothing is guaranteed. Taking some very low-level risks can end up paying off a lot more than taking a completely conservative approach to saving. Find out what your options are for different types of asset classes and investment styles and determine what combination optimizes your returns. If you can invest in your company, it is typically best to keep the company’s stocks to 10% or less for what you contribute.

8. Watch the Fees

One of the things to watch for when you diversify or start a new 401k are the fees. Some companies tack on a lot of little fees that add up to a tidy sum. Pay attention to those fees, and if they are taking enough out of your contribution to be noticeable, find another way to save. Whenever there are changes to your 401k, always read the fine print to see if they are adding new fees. Your 401k is supposed to be your nest egg, and you don’t want it going to a company that is trying to skim money off the top through unnecessary fees.

9. Go for Long-term Growth

One of the best things about 401ks is that you can tweak and adjust them to grow without you having to do much to them. Starting from day 1 is one way to maximize your 401k, but you should also be thinking about growth over the long-term. You don’t want to  fluctuate the amount of your contributions, so if you can constantly maximize how much you are contributing, you will contribute to that growth. It will take discipline and patience, as well as sometimes riding out some scary rides with the stock market. The stock market will always go up and down, so avoid knee-jerk reactions to fluctuations and sudden market changes. Make sure to have some mutual funds in your portfolio so that you can have some managed growth potential, even if that growth may be a bit slower – it could make you feel better about your other investments when they experience a sudden, sharp drop.

10. Revisit Your Approach Annually

Just like you update your budget every year, you should be reviewing and changing your 401k savings every year. There are always things that will affect how much you can move to your 401k. If you have a new car now and pay it off in two years, the money that went toward paying for the car can then go to your 401k instead. If you have assets that have been performing badly for a few years, it may be time to let them go.

Research should be a regular part of your annual review as well. If you have heard of something that interests you, take the time to look into it and see if it has the potential mentioned. Of course, exercise caution on new and trendy changes, but looking into new potential investments and seeing if you have a little extra to try them out can prove to be very beneficial in the long run.

This material is designed to provide accurate and authoritative information on the subjects covered. It is not, however, intended to provide specific legal, tax, or other professional advice. For specific professional assistance, the services of an appropriate professional should be sought.

All investing involves risk, including the possible loss of principal.  There is no assurance that any investment strategy will be successful.

Distributions from traditional IRA’s and employer sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching age 59 ½, may be subject to an additional 10% IRS tax penalty. Converting from a traditional IRA to a Roth IRA is a taxable event. A Roth IRA offers tax free withdrawals on taxable contributions. For complete details, consult your tax professional.

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