The majority of people in the workforce have a 401k plan in place. These are the most common type of retirement savings account for employees; most medium to large companies offer them to their workers.
A 401k is one of the best ways to fund your retirement years but many people make serious mistakes when it comes to managing their plan and getting the best possible outcome.
This is because few people really understand how to make the most of their 401k. According to a survey conducted by the Employee Benefits Research Institute, the median account balance of a 401k plan is a measly $18,000. This isn’t going to take you very far in retirement!
In fact, one of the most common financial mistakes American workers make is in regard to their 401k. So I’m going to look at a few ways you can improve the management of your 401k and maximize your returns.
5 Simple Steps For Taking Control Of Your 401k Plan
#1. Be In Control
The first thing to do is to be in control of your plan. Don’t just assume that your employer is doing the best for you in this regard. The worst mistake people make is ignoring their 401k and hoping it takes care of itself.
One of the benefits of a 401k plan is that you get to choose the type of securities your money is invested in. Your plan will have a range of investments to choose from, typically mutual funds, so you can create your own portfolio or group of investments.
You might think you don’t know anything about choosing investment strategies but don’t be intimidated by the process. You owe it to your financial future to take the time to select your own portfolio.
When individuals fail to choose their own portfolio, their account is often added to other ‘unloved’ plans and placed in a poor-producing, low-yielding default portfolio. That’s definitely not making the most of your money!
So make it a point to pick a portfolio. Most people can get away with 2 funds, a large cap stock fund and a bond fund. A good starting point is to put 60% of your contribution towards the stock fund and 40% towards the bond fund.
If you are open to a little more risk, which is another way of saying volatility, then you can add in small cap stock fund and an international stock fund. You should keep 25% of your contribution towards the bond fund and split up the remaining 75% between the stock funds.
At the very least, you should pick a target date fund if it is offered. Just pick the one that corresponds to when you expect to retire. This will ensure you are at least invested in the stock market and you money isn’t just sitting in cash.
#2. Take Advantage Of Free Money
The other area where you need to pay attentions to is with employer matching contributions. If your company offers matching, make sure you understand the rules and conditions that apply so that you can get the maximum matching contribution.