Smart 401k planning must knows

Heart monitor on piggy bankKJ: We recently came across a quick 401(k) article talking about 7 ways to avoid a 401(k) disaster. In my opinion, there’s never too much you can read or understand about your retirement plans, so we’ve created our own set of do’s and don’ts when it comes to common 401(k) mistakes to avoid. We’re not forgetting about those of you who have a 403(b), as this list applies the same to you! Read the full MSN Money 401(k) article here.

Take full advantage of your employer’s match
Mistake #1. Don’t leave money on the table. Even if you think you can’t possibly save money because your cash flow is too tight, chances are you actually can come up with a solution. Even if it’s an extra $50 or $100 per month, that can make a huge difference in getting you on track for your goals. You may not be able to make a change in one area to come up with the extra $50-100, but maybe you can adjust a few categories. Cut out that movie channel package, get a cheaper electricity provider, cut out dining out once per week (this alone could save most couples $120 per month), or shop around for some deals and coupons before you make a purchase. Stop making excuses, and do whatever it takes to at least get your full employer match!

Take advantage of the 401(k) Roth feature
Sure, not every firm has this, but more and more companies are offering it nowadays. If you’re young, in a low tax bracket, and have a LONG time until you retire, then not participating in the Roth feature of your account is a big no-no. You pay taxes on the money this year (i.e. you can’t deduct your contributions like you can for a traditional pre-tax 401(k)), but money withdrawn in retirement is tax-free! Huge win for us young savers.

Know your fees
All investing involves not only risk but also fees, so be aware of what you’re getting charged. New regulations enacted in 2012 require your 401(k) plan to provide detailed fee expense information. Not all fees may be paid by you, but it’s important to know what they are. In addition to administrative and record-keeping fees, there are also mutual fund fees (commonly known as an “expense ratio”). Each mutual fund is different, and various strategies have differing amounts of fees. However, just because a fee is higher than another fund, doesn’t mean it is not appropriate. Large company domestic stocks are usually lower in expenses compared to an international stock strategy, so know the differences and make sure you’re comparing apples to apples.

Know your investment options
Pay attention to the options you have to invest in. Much like you probably shop around for the best retailer when making a purchase, do your research to make sure you are picking the right funds for your goals and risk appetite. If you aren’t prepared to analyze all the factors in making an investment decision, then hire out proper counsel!

Diversify your investments
Just because yesterday’s top performer did well, doesn’t mean it will be tomorrow’s best performer. The purpose of diversification is to build a more stable portfolio over time, so some funds will under perform while others outperform in different market conditions. As we’ve seen twice over the last 13 years, stock markets (or real estate) don’t always go up! It’s part of the cyclicality of markets, and knowing that is half the battle.

An important component of this aspect is periodically watching how your investments are positioned. If you own a fund that is considered an “asset allocator” (meaning it could be invested in stocks, bonds, cash, etc.) or target date fund, then it’s important to watch what they do in conjunction with your other investments. Digging into the numbers may help you realize you’re either way LESS or way MORE positioned in one area – too much Europe, too much U.S. small cap?…

Know your retirement needs
Chances are you may not be equipped to know realistically what you need to have for retirement (is it $500,000, $1,000,000, or $5,000,000 – all entirely contingent upon what your expenses are). Work with a knowledgeable advisor to help you navigate not only how to position your portfolio, but also what milestones you’re trying to reach for. If you don’t know where your “financial independence” ship is headed, how can you ever expect to know when you’re there?

Use your account for retirement purposes ONLY
While there are a few IRS tax provisions to allow you to avoid penalties for withdrawals prior to retirement (or at the earliest of age 59 1/2 as set by the IRS), using your retirement funds for non-retirement purposes can be disastrous. Don’t dip into the account before it’s time. You may not even realize the compounding effect of the $1,000 or $5,000 you “need” now and what that could do for your long-term retirement plan!

    Are you maximizing your 401(k) or 403(b) contributions?
    What would motivate you to take advantage of the employer match?
    Is there anything you would add to this list?

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