Making 401 (k) contributions is usually an autopilot investment, which can be a good thing. You are practicing the average cost in dollars, which means that you automatically invest on a regular basis, whether stocks are up or down. Since you fund a 401 (k) plan through payroll deductions, you probably don’t even lose the money you invest.
But you don’t want to go into full intervention mode with your 401 (k) plan. Checking in from time to time will ensure that you choose the best investment options and that you are on the right track to reaching your retirement goals. Here’s how to do a quick check on your 401 (k) in 2021.
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1. Check the beneficiary
Even if you have a will, it is essential to verify that the beneficiary designated for your retirement accounts is still the person who should receive the money when you die. Beneficiary designations replace wills. This means that if the beneficiary listed in your 401 (k) is someone you divorced a decade ago and your will says your new spouse keeps all of your assets, your ex-spouse will still receive your 401 (k) money .
Although the new year is a good time to review your beneficiaries, it is essential that you update this information whenever you experience an important event, such as marriage, divorce or the birth of a child.
2. Estimate your retirement goals
It is difficult to predict your retirement needs, especially if you are in your 20s or 30s. But financial planners generally recommend replacing around 80% of pre-retirement income. Even if your golden years are still decades away, use a retirement calculator at least once a year to estimate whether you’re on track to achieve your goals. As you approach retirement, it will be easier to enter more accurate numbers, because you will have a better sense of how long you want to work and when you plan to apply for social insurance.
3. Make a plan to catch up
If you fall short of expectations, the sooner you start saving more, the easier it will be to catch up. Make sure you get the full 401 (k) match from the company. Also, look for ways to save more, even if you can only invest 1% or 2% more of your salary. If your 401 (k) investment options are limited, you may want to contribute only the amount needed to get your full match and then invest the rest using an individual retirement account (IRA).
In 2021, you are authorized to contribute:
- Up to $ 19,500 for your 401 (k), plus an extra $ 6,500 if you are 50 or older.
- Up to $ 6,000 for your IRA, plus an extra $ 1,000 if you are 50 or older.
4. Review your risk tolerance and asset allocation
You never want to drastically change your risk tolerance in response to short-term stock market fluctuations. But revisiting how much risk you are taking with your 401 (k) once a year is a good strategy. If you are afraid of a stock market crash or are approaching retirement, you will want to change some of your shares from stocks to bonds, even if it means lower returns. Or if you are concerned that your money is not growing fast enough, you would switch more to stocks, even if it means taking more risks.
Rule 110 can provide a good estimate of what your allocation should look like: Subtract your age from 110 to obtain the proper inventory allocation. Therefore, a 30-year-old man would target 80% stocks and 20% bonds, while a 50-year-old man would want 60% stocks and 40% bonds.
5. Make sure your rates are low
Review your 401 (k) rates each year to make sure investment costs are not eating away at your returns. Many plans offer target date funds that automatically rebalance based on your age and planned retirement date. Convenient, yes, but the average expense rate is 0.51%, which means that $ 51 of an investment of $ 10,000 is earmarked for fees.
Many plans also offer passively managed index funds with an expense rate of 0.1% or less. This may not seem like a big difference, but if you invest $ 5,000 a year and get a 6% annual return, reducing the expense ratio from 0.51% to 0.1% would leave you with almost $ 30,000 extra at the end of 30 years.