Managing your personal finances is not hard, but it’s not effortless either. Just like your yearly physical or bi-annual eye exam, set an appointment with yourself to go through your finances. If you schedule this during tax season, you’ll make life easier on yourself because you will already have all of your documents out and organized. We already talked about your credit report and we’re all aware of taxes, but what about the future? When was the last time you looked at your 401(k)? Are you even sure what you should be looking for? Once a year, look at it for these basic things and you’ll find that your retirement account will be all the healthier for it.
Are you signed up?
A large percentage of companies offer their employees a 401(k). Surprisingly, a larger number of Americans are not signed up for one. The two biggest reasons: they thought the company did it for them and they don’t think they can afford to save. The truth is the company WILL NOT DO IT FOR YOU. They are required to let you know about it and distribute the packet. The responsibility to sign up is all yours. As for not being able to afford to save, you really can’t afford not to. Social Security is a very old Band-Aid that might be gone by the time most of us hit retirement age. Even if it is still around, it won’t give you much. Even if you have an IRA, you can’t match the tax benefits that you get from your 401(k). Add that to company dollar matching and compounded interest, and it would be very hard to end up with the same amount without dipping much deeper into your pocket.
A lot of times people will say, “You can do better on your own.” In part, that is completely true, but here are some things to consider. First, are you really going to get and manage your own retirement account? Only about 5% of people who attend financial investment seminars actually do anything with the knowledge they have received. I don’t even want to know how many people pass on their company’s retirement plan and then don’t sign up for an IRA. Second, remember those tax advantages for your 401(k). You can’t get those from an IRA, and that free money won’t come with it either. Lastly, consider the source. Is this “recommendation” coming from a financial advisor or the guy in the next office? A lot of times people give financial advice without looking at the big picture. It would be well worth the awkward question to see how his try at investing has gone. Just because her account isn’t growing, that doesn’t mean yours won’t under different management strategies.
Is your contribution maxed out?
Considering the tax benefits and the advantages that compound interest will get you, your best possible choice is to max out your contribution. It really doesn’t take as much from your monthly income as you might think, one you account for pre-tax contribution benefits. Anything the company will contribute on your behalf only makes that more appealing. If you still don’t think you can contribute the maximum, then try a tiered approach. Contribute 50% for a while and see how that affects your budget. If that works out ok, then bump it up to 75%, and then on to the maximum. This is also something you should check every year with your HR folks, because the legal limit changes from year to year. They will have the numbers on hand, or know where to find them. Remember, apathy is the personal plague of investing. Make no mistake: your retirement account is an investment—treat it appropriately.
Is your account “balanced”?
I’m sure you’ve heard of having a diversified investment portfolio. Not putting all of your eggs in one basket provides a bit of a safety net in the event that one of your investments should significantly decrease in value. The same principle applies to IRA’s and 401(k)’s. A good rule of thumb is to put 60% of your retirement dollars in stocks and the remaining 40% in bonds. This approach will give you a majority of the stock market’s return with less risk. Keeping your account balanced in this way doesn’t let you off the hook entirely, but it does let you breathe a little bit easier.
How is it performing?
Answering these questions once a year will do wonders for your retirement account balance and your peace of mind. Each program should come with a Welcome packet that contains basic information and instructions to implement the decisions. You should read the packet completely before starting your 401(k), but it won’t kill you if you don’t. Make the best decision possible when you start investing, but you can always change your mind and change your investments. Information is available on the performance of different mutual funds and individual stocks. Yahoo financial is easy to use and has a diverse library of financial information should you decide to use it. If your choices haven’t performed as well as you hoped, then make some new ones. You won’t get hit with any withdrawal penalties because you are just “rolling over” from one to the other.
When planning for your future, the most important thing is to start. If you don’t do anything else good for you this year, at least check on your retirement money. If you’re not enrolled, get enrolled. Max out your contribution and ask as many questions as you need to. You do not have to know what you are doing going into it, and any financial advisor will tell you that you should always ask rather than assume. Another bonus you may not be aware of is each major company that offers your employer a 401(k) has a dedicated advisor for the employees of your company. Get the contact info for that person from your HR staff and let them help you choose. Put a little time and effort in up front and you’ll reap the benefits later.
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