National 401k Day

Michelle Barron |
Categories

Some things go together; peanut butter and jelly, love and marriage, retirement savings and retirement. This week, we celebrate National 401(k) day, so it seems fitting to talk about employer-sponsored retirement plans, specifically the 401(k) plan.

Congress passed legislation allowing the tax-free way to defer compensation and 401(k) tax code in the late ’70s. It can’t be that surprising that these plans, the options, and rules can all be confusing. Over the years, Congress has modified the regulations to help bring them in line with the challenges we face. I imagine we will continue to see updates in the future. 401(k)s are not perfect due to their sometimes limited investment options, fees, and potential early withdrawal penalties.  Still, they offer a great way to save for retirement as long as you avoid some of the most common mistakes. 

While I believe routine saving into a retirement plan is half the battle in having enough assets to retire comfortably, what you do with those savings is one of the other factors that come into play. Unfortunately, electing a retirement plan withholding from your pay is not enough. Sometimes your choices lead to less money than you may have been expecting or less than you could have earned. As a consumer, my goal is usually to get the most bang for my buck. As a financial advisor, my goal is to make the most of my savings to achieve my goals. Over the years, some common 401k missteps leave many falling short for meeting their retirement goals.  Make sure you do not fall prey to these common mistakes.

Wasting opportunities for matching funds

If you were walking down the road, found $1,000 on the ground, would you pick it up? If you said no, I don’t believe you. Everyone likes free money.  Employers often offer free money to an employee in the form of 401k matching contributions.  It really isn’t free money. It’s part of your compensation package; if you do not elect to take the matching funds, you are working for less compensation. I can’t imagine many times where it does not make sense to at least take advantage of the match.  Review your company’s policy to see if your company offers 401k matching contributions and if so, how much.  If you are not contributing enough to get the match, consider doing so.

Loading up on company stock

Many companies offer and encourage holding company stock inside their 401k plans.  Thanks to the Enron meltdown, where large amounts of plan assets were lost due to company stock becoming worthless within a matter of weeks, most people are familiar with a basic lesson. Don’t put all of your eggs in one basket.  Keep in mind, though; a company doesn’t have to go under; even plummeting share prices can be disastrous for your retirement account.

While you do owe your employer your time and effort, don’t allow the incentives to entice you to be willing to put your retirement at risk. I suggest no more than 10% of your net worth in your company’s stock, and even that I think is too high for most people.

Putting your current income and a large portion of your future income in just one basket exposes you to too much additional risk.

Not knowing when to make changes

It seems many people fall into extreme categories when it comes to how they manage the investments within their 401(k).  Some people just accept the auto-enroll, default contribution rates, and default investments on one end of the spectrum and never explore the options available to find the best fit. On the other end of the spectrum are the people who are always making changes. The news, the markets, and the water cooler talk cause them to make frequent adjustments within the plan. I suggest more people aim for a goldilocks approach and end up in the middle. It’s no surprise that markets move, and not all securities move in lockstep with one another. This is one of the reasons people diversify. You need to make sure you take it one step further. Define and practice a rebalancing strategy where you are systematically reviewing your allocation and bringing it back in-line with your targets. Rebalancing can be a great way to help stay focused on the idea of buying low and selling high and avoiding what more commonly happens, selling low and buying high. 

Trying to play catch up

Parents often prioritize their children ahead of themselves, up until 18, and many through the college years and beyond.  I am a parent myself and appreciate the desire to see my child succeed, and I am committed to doing my part.  I am also a financial planner and understand that I may not successfully retire if I don’t care for myself. Failure to plan for retirement can even create burdens for your children later in life. Unfortunately, you cannot take a loan to fund your retirement. Your child, on the other hand, has many different options for assistance with education expenses.  If helping your kids jeopardizes your retirement success, consider other options, and take the initiative to focus on yourself. In 2020, 401k plans allow you to defer up to $19,500 of your salary towards your retirement goals.  Those over 50 you can contribute an extra $6,500 to your qualified plan.

By actively contributing to your retirement plan and steering clear of investment mistakes, you help increase the likelihood that you will have enough money during your golden years.  Do you need help navigating your 401k or planning for your retirement?  If you are not a financial professional, it can make sense to seek an expert’s advice. The professionals at River City Wealth Management specialize in retirement planning and can help you.  Call our office today for a complimentary consultation; (904) 374-9098 or schedule your appointment online; www.RiverCityWealth.com

This material is provided as a courtesy and for educational purposes only. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation. Let us know if you have any questions.This material is provided as a courtesy and for educational purposes only.