This 401(k) Day, here are Three Tips to Bring Your Plan into Alignment with Your Financial Goals
By Joshua Mersberger, Regional Director, Merit Financial Advisors
While Americans are saving more for retirement today than they did 30 years ago, are they setting themselves up for success? 401(k) Day, which occurs annually on the Friday after Labor Day, provides a day to focus on retirement planning and preparation and take stock of one’s retirement needs.
While 401(k)s are still the gold standard of retirement planning for their company match, tax benefits, and automatic contribution benefits, too many investors still aren’t aligning their biggest asset with their financial plans. Undoubtedly, working with a financial advisor will bring conformity between assets and plans held by different providers, but what else do you need to know?
In the spirit of 401(k) Day, here are three ways to take advantage of your plan heading into the end of the year.
- Check your contribution matches and limits
One of the biggest misconceptions about 401(k) plans is that the individual’s employer is actively managing the plan, providing a false sense that the plan can operate effectively on its own and in perpetuity. As with any financial planning, regular check-ins will help ensure you’re on track to meet your goals. Your financial planner will also encourage you to contribute more to your 401(k) plan, especially as your salary increases.
Contributing at least enough to participate in your employer’s company match – if they have one – is prudent. We typically advise contributing at least 10% of your salary, but that doesn’t always work for everyone. Since 401(k) plans have fewer income limitations than IRAs, investors should use it to their benefit, adjusting and maxing out contributions when possible. On the other hand, if you lose a job (and an employer match), your retirement savings won’t have to sunset. IRAs alone provide additional investment options and can be set up by the individual directly. In a perfect world, you can max out contributions for an IRA and 401(k) annually to reap the biggest benefit.
- Track down any old plans, now
Changing jobs is a fact of life. Yet, too often, investors will forget about smaller amounts of capital held in retirement plans from jobs early in their careers. Perhaps they don’t know how to identify them, how to move them, or what to do with them. Luckily, technology has improved and has made this process much simpler. Rolling over plans directly from one employer to another without cashing them out remains the most beneficial course of action and is tax free if done correctly.
Lost track of an older plan? At Merit, we help track them down and aggregate the total savings under one umbrella to provide a comprehensive picture of your retirement assets. You can also search the National Registry of Unclaimed Retirement Benefits database using your Social Security number to find any unclaimed retirement benefits.
Just remember: when you move jobs, roll over the funds to your retirement plan, and beware of penalties and taxes if you roll it over to cash.
- Take yourself off autopilot
It’s far too common today for a client’s 401(k) savings to be disjointed from their overall wealth management strategy. Anecdotally, we’ve found that over80% of our prospects’ 401(k) plans don’t align with their current goals for a variety of reasons, including haphazard fund selection or a lack of updates to match life changes.
While technological advancements have certainly helped better predict an individual’s retirement needs, customization to ensure the fund matches your risk tolerance should be assessed regularly. While participating in a standard target date fund is better than nothing, a financial advisor can determine which glide path makes the most sense for you.
One of a financial advisor’s most important roles is to help clients manage their emotions and stay true to their financial goals. When we meet with prospects who manage their own 401(k), they’re more likely to move to cash when startled by market volatility, have an uneven asset allocation that risks market gains, or leave good money on the table in ghost accounts. Don’t let that be you!
The importance of your 401(k) strategy cannot be overstated
For the average investor, their biggest asset in retirement is the 401(k); sadly, it is likely not being maximized to its fullest potential if you are not working with a financial advisor. Use this national holiday to find your latest 401(k) statement and consider if you could be making smarter choices for your retirement now.
Are you interested in speaking to a financial advisor to fine-tune your 401(k) planning? Contact Merit Financial Advisors today for a complimentary consultation.