Don’t just set it and forget it – tips for looking after your retirement money
Lots of investors never bother to check on their 401(k) regularly. But you should keep a constant eye on your funds’ risk level, whether your asset allocation is out of whack and if your beneficiaries still are the ones you want.
When you first start a job and join a 401(k) or another employer-sponsored retirement savings plan, you fill out a few forms, decide how much you want to contribute, and you pick some investment options.
Then each month, like clockwork, a part of your paycheck goes to your retirement account automatically. It’s easy to just set it and forget it, but this mindset can cost you in a big way.
Although you don’t have to follow every tick in the market, you do need to look after your retirement money. Here’s how:
If you don’t want to choose specific investments for your plan, then you can put your money in these funds, which focus on a date when you might want to retire. Target-date funds adjust their investment allocation to match your risk tolerance, considering your current age and a theoretical retirement age of 65. Your mix gets more conservative as your retirement age approaches.
The tricky part is this allocation varies greatly among these funds. Two funds with the same target date may have completely different investments and levels of risk. For instance, one fund may have a 50% stock allocation and another 70% for someone who wants to retire in 20 years. Target date funds don’t take your individual situation into account. The risk may not be appropriate for you.
If you invest in such a fund, look at the overall investment allocation to make sure that the risk in the fund matches your tolerance.
If you select investments when you enroll in your 401(k), but haven’t looked at them in awhile, that allocation may no longer be appropriate. Over time, you may take on more risk than you want, especially when you don’t rebalance your account.
There may be additional investment choices with lower fees, or an allocation that is abetter fit for your goals.
You shouldn’t put your 401(k) on autopilot, but the automatic rebalancing feature is helpful in maintaining your intended allocation and keeping risk in check.
Over time, your account may drift away from your original allocation. For example, let’s say that you chose an allocation of 50% stocks and 50% bonds in your 401(k). In a heated stock market, the percentage of stocks grows to 70% or more, exposing you to additional risk. If you switch on the rebalancing feature, the account automatically sells stocks and buys bonds to return to the 50/50 mix. Think of it as a sell-high-buy-low feature.
The most common mistake is forgetting to update your beneficiary form. This one-page document, not your will, decides who gets your retirement account. If you get married, have kids or get divorced, chances are it’s out of date. Should something happen to you, your family members may be shocked to find out that your ex-wife gets the 401(k) money. Most plans give you online access to the form, so make sure you capture any changes.
Automatic features of your 401(k) save your time and simplify saving for retirement, but periodically reviewing your plan prevents avoidable mistakes from derailing your retirement goals.
You don't need to follow every tick in the market - that's a recipe for jumping off the roller coaster while it's moving. But a real look once or twice a year is smart. Check that your risk level still fits, that your allocation hasn't drifted, and that your beneficiaries are still the people you'd want. Set it and forget it can quietly cost you.
Rebalancing just brings your account back to the mix you chose. Say you set 50% stocks and 50% bonds, and a hot market pushes stocks up to 70%. Now you're carrying more risk than you signed up for. Rebalancing automatically sells some stocks and buys bonds to get you back to 50/50. Think of it as a built-in sell-high, buy-low feature.
They can be a fine starting point if you don't want to pick your own investments, but here's the catch - two funds with the same retirement date can hold completely different mixes. One might be 50% stocks and another 70% for the same timeline. They don't know your individual situation. So if you use one, peek under the hood and make sure the risk actually matches your comfort level.
This one surprises people. Your beneficiary form decides who gets your 401(k), not your will. That's why it's worth keeping current. If you've married, had kids, or divorced and never updated it, your family could be in for a shock - we've seen an ex end up with the money. Slightly morbid to think about, but if we don't talk about it, who will?
Not entirely. The automatic features - payroll contributions and automatic rebalancing - are genuinely helpful and save you time. But autopilot isn't the same as ignoring it. A periodic review keeps avoidable mistakes, like an out-of-whack allocation or a stale beneficiary, from derailing your goals. Does that make sense?
It pays to look, because fees are like a snowball rolling downhill - shave a chunk off every time it rolls over and it picks up a lot less snow over the decades. Review your plan's options for choices with lower costs. Some 401(k) menus are stupid expensive, and a small difference in fees compounds into real money. If you'd like a second set of eyes on yours, just give us a holler.