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Ten Tips to Strengthen Your 401(k) Plan

Written by prositesfinancialOct 29 • 4 minute read


While there are many things in life that we should be doing, maintaining a healthy and robust 401(k) plan does not need to be one of them. With some good management habits, basic discipline, and consistency, your 401(k) plan can perform very well and serve you well. In this article, we’ll explore ten tips that could help you to take better advantage of your existing 401(k) plan or a future one.

1. Begin contributing right away.

Over 25 percent of Americans who currently have access to a 401(k) plan do not even use it, according to the American Savings Education Council. These people are placing their entire retirements in jeopardy by not participating, yet they still refuse to do so. This is the danger of the temptation of immediate gratification. While it can be very tempting to put off saving for retirement, the earlier you begin, the more of an advantage you have, thanks to compounding interest. If these people don’t contribute at all, they may not be able to retire at all, which could put them in a terrible situation when their golden years finally arrive. Your retirement date is still coming, whether you are preparing for it or not!

2. Contribute as aggressively as possible.

Each year, there is a maximum amount that you are legally allowed to contribute to a 401(k) plan. This number changes periodically (it generally goes up), so be sure to check the updated numbers for the current year so you can take maximum advantage of your 401(k) plan’s benefits. For example, as of 2019, the maximum 401(k) plan contribution limit is $19,000 per year. If you can physically afford to contribute that maximum amount, it is generally a good idea to do so. The more you put into your 401(k) plan and the sooner you do so, the better the standard of living you can look forward to during your retirement years.

3. If you fall behind schedule, make up for it.

If you are age 50 or older, you may be able to make catch-up contributions to your 401(k) plan, thanks to a pension reform bill that was passed in 2001. Like the annual 401(k) contribution limit, this number is changed periodically, so be sure to check the current limit. As of 2019, the current limit on catch-up contributions to a 401(k) plan for people age 50 or older is $6,000. These contributions are pre-tax and can help you to make up for lost time in contributing to your 401(k) plan during the final years leading up to your retirement date. Because making these contributions could make a significant difference in your post-retirement standard of living, if you can afford to make them, it is generally a good idea to do so.

4. Be sure to meet your employer’s match contributions.

If your employer has a matching contribution benefit, be sure to take advantage of that by meeting their limit. For example, if they will match 50 percent of all contributions up to $5,000 each year, then that is $2,500 of free money each year if you contribute the full $5,000. With matched contributions, the less you contribute, the less free money you receive.

Also, be sure to check how your employer matches your contributions as well. For example, some employers might match it in company stock, while others might match it by mirroring your own investment choices. You will want to see how this matching fits in with your asset allocation strategy, and perhaps adjust your other investments accordingly.

5. Don’t put all your eggs into one basket.

As with any investment portfolio, the contributions to a 401(k) plan should be diversified across a wide range of investment types and risk profiles. This can help to prevent the excessive risk that comes with having all your funds invested in a single category or security.

Diversification can help improve the probability that your portfolio will be able to support you during retirement. It is essential to diversify in such a way that you are not being too conservative and limiting growth, but at the same time not being too greedy and exposing your retirement portfolio to inappropriate risks.

Another essential tip is not to invest too high of a percentage of your portfolio in your own company’s stock. As a general rule of thumb, it is best not to invest more than 10% of a retirement portfolio in your own company’s stock.

6. Keep the big picture in mind when investing.

After you’ve made your contributions and invested them across a diverse collection of asset classes and investment styles, you must let it sit and do its job of growing. Avoid excessive trading or “churning” in your retirement portfolio, which racks up lots of expensive trading fees and fails to allow adequate time for your portfolio to ride out normal market fluctuations and experience long-term growth.

It can be incredibly tempting to sell stocks or funds when they begin to drop, especially leading to a bear market. Self-discipline is crucial when managing a long-term portfolio and aiming for successful retirement. For a portfolio to do its job, it needs to be able to ride out bear markets as well as bull markets.

7. Invest in using a long-term growth strategy.

Retirement accounts grow not only from the initial contributions we make to them but also from the growth of the securities within them. It is vital that a retirement portfolio is set up to grow through investment in stocks and other market-driven securities, and not be so conservative that it fails to improve enough to fund your desired post-retirement lifestyle.

8. Examine your portfolio each year.

While it is important not to mess with your portfolio allocations too much during the year, it is equally important to check in every year and do an annual review to see whether each investment in your portfolio still deserves a place there. You also may want to check for drift, where different investment types have increased or decreased percentage-wise in your overall asset allocation. Then, you can rebalance your portfolio to retain the desired asset allocation percentages.

9. Avoid making early withdrawals.

Removing funds from your 401(k) defeats the purpose of having put them in there in the first place and negates the tax advantages too. The tax-free compounding of interest in your portfolio is what makes retirement accounts beneficial. When you pull money out early, it can be self-defeating.

10. Learn about your 401(k) plan.

At the end of the day, while there are professionals out there who can try to help you stay on track for retirement and take full advantage of your 401(k) plan, no one knows your retirement goals and investment preferences as well as you do. By educating yourself constantly and learning new things about significant financial investments regularly, you can help improve your understanding of retirement accounts, investments, and planning. If you have an advisor or accountant who helps you with these things, ask plenty of questions and pay attention during meetings. This enables you to take personal accountability for your retirement plans.

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