Over the last several weeks, I’ve had a number of conversations with friends and colleagues about their 401k plans. I was pleased to discover that a few people were taking an active role in monitoring their fund choices and capital markets and, in general, had a good handle on their retirement savings.
But there were other conversations that made me nervous. One individual couldn’t name their 401k provider or any of the available fund choices. Another (and I hear this all the time) said they signed up for their plan years ago but hasn’t looked or thought about it since (GULP!).
To those individuals who choose to be unplugged from their 401k, I’d like to say this: Pensions are a thing of the past. For most Americans — and probably you — 401k’s are now the primary source of retirement income. Unless your circumstances are exceptional, you literally can’t afford to ignore it.
So how do you get a handle on your 401k? Here are a few starting points. If you commit to do these in the next month (there are only four, so no whining), you will take a significant step toward securing your financial future.
1) Get Smart. Read the material your 401k provider sends you or has on their website. At a minimum, you need to know what funds are available to you and the difference between the stock and bonds funds. If you don’t understand what you’re looking at, call for help.
Ten minutes with a 401k representative can help you determine which types of funds behave well in strong economic times and how interest rates effect bond investments (hint: Interest rates rise — most bond prices go down).
2) Give a Little Bit. As of 2013, 401k participants can now contribute up to $17,500 to their investment and anyone older than 50 can contribute up to $23,000. You don’t need to jump to that full amount tomorrow, but try to increase your contribution by 1 percent every six months.
3) Mix it Up. Don’t leave all your money in the money market or a stable fund. Interest rates on these investments are less than 3 percent, which, by the way, is not keeping pace with the cost of living. You need to mix it up.
One simple solution is to look for Target Date Funds, a standard offering with most 401ks. While the cost for these are a bit high for my taste, you do get an investment strategy based upon your age and retirement date, and one that does the reallocation leg work for you.
4) Get Help When You Need It. The truth is not everybody has the time, inclination or ability to manage their finances. Thankfully, there are professionals locally and online who can help you take control of your 401k. Sound self-serving? To some extent. But I would no sooner try to fill a cavity in my mouth than some people should try to evaluate funds or plan for their financial future 20 years out.
Don’t be proud. If it’s beyond you, go get help. Your financial future depends on it.