How is Your 401(k) Doing?

You probably don’t think of your 401(k) as one of your prized possessions like your home, your car or your boat if you happen to have one, but it could become more valuable than any of these.  Your 40(k) could become the primary source of your retirement security, a retirement that can last for 30 or more years.  Are you giving it the care and attention it deserves?   Are you doing your part to maximize its growth without taking on more risk than you should?  Are you reading your statements and understanding what has happened since the previous one, or are you filing them away because you are not sure what to do?  Do you have any idea of the expenses taken out of your account to pay for administration and investment fees?  Do you know if your money is allocated to plan investment options that are appropriate for you at this stage in your life?  For most people the answer is no.  It is not too late to make some changes if you are like most folks.

First, you need to begin treating your 401(k) as one of your prized possessions.  You should know that if you have a 401(k) you are one of the fortunate ones, as many employers (especially small businesses) do not offer a 401(k) plan.  Often, they are under the erroneous belief that it is too expensive.  I use the term 401(k) plan because it is usually the plan of choice, but if you are self-employed and have a Simplified Employee Pension Plan (SEP), or are an employee that has an IRA because your employer does not offer any retirement plan, this posting can also be helpful in providing guidance and suggestions for taking control of your retirement plan.  You can begin treating your plan as one of your prized possessions by learning more about the plan.  You should know how the plan is operated (if it is a 401(k)), when you become vested (take ownership) in your accounts, what is the employer matching formula if there is one, and the various investment options available to you under the plan and the related expenses.

Second, to achieve your goal of maximizing the growth of your accounts you need to save as much as you can afford over your working years.  The most important component of growing your retirement account is the amount of savings or contributions you make to the plan and not your investment return.  At a minimum you should save enough to earn the full employer match if there is one.  You will be leaving “free money” on the table if you fail to do this.  This however, is the minimum and will not assure you of having enough money in your account when you are ready to retire.  Most employer matches are capped at a certain level of wages, usually 6 percent.  You need to contribute much more.  You can do this by setting a goal of 10 percent of salary.  If you can’t do 10 percent do 8 percent.  Increase your contribution each time you get a pay increase even if it is only cost of living.  Should you be fortunate to receive a bonus or additional compensation contribute as much as you can from the extra payment to the 401(k).  And contribute the 2 percent reduction in Social Security tax for 2012 to your retirement plan.  Avoid borrowing from your 401(k) as it is not a good idea even if your plan makes loans easy to get.

Consider using outside expertise if you are unsure that your investments are properly allocated based on your age, your financial goals and your risk tolerance.  Such expertise can sometimes be obtained from the firm that manages your 401(k) for your employer at little or even no cost, or online by several companies that provide this service for a fee.  In some cases it may be helpful to engage a financial professional who can provide unbiased assistance tailored to your individual situation.

Today’s reality is that most people will fund their retirement with a combination of Social Security, retirement accounts and personal savings.  Social Security is likely to be a smaller percentage of the total due to increased retirement age and reduced benefits mandated by the government.  The burden of retirement has shifted to the employee from the employer due to the demise of pensions in the private sector.  Therefore, retirement accounts and to a lesser extent personal savings have become the most important components of a comfortable retirement.  Your 401(k) plan may be the deciding factor in determining when you can retire and how comfortable your retirement will be.