Company Retirement Plans, the 401k Plan, the 403b Plan, and the 457 Plan, are a fantastic tool for you to save for your retirement. They allow your savings to grow tax-deferred. Contributing to these Plans will reduce your current taxable income in the year that you contribute and your investment gains and interest earned will not be taxed; you will pay the taxes typically in retirement years when you take distributions.
These Plans generally offer the participant a variety of mutual funds to choose to invest in. There are a few things that you should be doing to maximize your investments to increase your probability for a secure retirement.
[1] Maximize your savings
This is the most important step to achieving a secure retirement. The rule of thumb is to contribute a minimum of 10% of your Gross Wages. Ideally, you would contribute 20%. Understand, the maximum contribution for 2018 for these Plans is $18,500. If you made $185,000 per year then this would make up 10%. So, if you make more than $185,000 per year, you should consider additional savings.
[2] Choose the proper investment(s)
Your investment choices can be confusing. Company Retirement Plans generally have an Investment Advisor, or Advisors, that will assist the participants. You should be able to connect with someone for guidance. If you are working with a CERTIFIED FINANCIAL PLANNER™ (CFP®) or Investment Advisor independently it makes sense to seek their advice considering they should have a clear understanding of your investment goals and they should be able to provide you with a proper allocation. If you choose to DIY, then consider utilizing a Target Date Fund. Most company retirement plans these days will offer a few Target Date Funds. This makes it very easy for the investor; simply choose a year you are considering retiring and choose the Fund that falls closest to that year. Target Date Funds are a good choice because they will perform #[3] for you automatically.
[3] Choose the proper allocation (if appropriate)
If you are using a Target Date Fund, then this step is done for you. If you are consulting with a CERTIFIED FINANCIAL PLANNER™ (CFP®) or Investment Advisor, it’s very likely that they have gone through a thorough Q&A with you to evaluate your risk tolerance along with your financial goals and budget analysis in order to arrive at an optimal investment allocation that’s tailored for you. This may result in utilizing a target date fund, or they may suggest allocating your portfolio utilizing various investments.
[4] Rebalance Annually (if applicable)
Using a Target Date Fund? Then this step is automatically done for you. If you are working with a CERTIFIED FINANCIAL PLANNER™ (CFP®) or Investment Advisor, then you’ll want to revisit your allocation annually. Consider it your annual financial health check-up. We have our cars serviced at least twice per year, we have annual doctor physicals, we visit the dentist every 6 months, we have home furnaces and HVAC’s serviced, etc. Having a check-up for our financial health should be on your annual to-do list.
Sources:
[1] https://www.cnbc.com/2017/02/22/heres-how-much-money-you-should-have-saved-at-every-age.html
[2] http://money.cnn.com/retirement/guide/investing_basics.moneymag/index7.htm
[3] https://www.investopedia.com/articles/retirement/07/life_cycle.asp
Keith Weiss CFP® 