The average American worker has a little more than $121,000 stashed away in a 401(k) account. Yet many professionals aren’t sure how to make the most of this retirement vehicle. Should they increase the amount of their contributions? Switch up the portfolio mix? It’s worth asking these questions because having money later in life is critical.
Yes, you can expect some type of Social Security benefits, which aren’t expected to run out in your lifetime. However, Social Security payments are unlikely to be enough to sustain you.
Besides, you never know what challenges you might face as you get older, such as needing expensive out-of-pocket medical care. Or you might want to help your parents pay for their aging costs. You’ll also want to have enough funds to be able to enjoy your retirement years to their fullest.
This leaves you with a few ways to stock up for the future, including making the most of your 401(k) investment. Below are some tips to help you get a handle on your 401(k) so it works for you for decades.
Tap Into Your Company’s 401(k)
Many workers don’t take advantage of enterprise or small business 401(k) options through their employers when they first start a new job. Instead, they figure they’ll wait and see how much they can afford to contribute. However, they may forget to join the 401(k) plan when it re-ups or they may not even realize they’re eligible for a 401(k) at all.
Even if your company hasn’t said a word about 401(k)s, inquire about it. If you find out that you can contribute to a 401(k) at your workplace, do it. Not only will you get an immediate tax benefit by putting pre-tax dollars into the account, but you could earn even more. Many employers will match a certain dollar amount or percentage of what you put into the 401(k). That means more retirement money for you in the long run.
Get the Match
If your company promises to match up to 3% of your income towards your 401(k) if you do likewise, then do it. Why only contribute 1% or 2%? You’ll just lose money that you’ll wish you had down the road. Really, you won’t miss the 3%, especially if it comes out of your first paycheck. Instead, you’ll just get used to bringing in a little less.
This doesn’t mean you have to stop at your employer’s match, though. Lots of employees with 401(k)s put as much as they can into their accounts. Be sure to ask about contribution maximums when you sign up. Then, crunch your household budget numbers to find out what percentage or amount is reasonable.
Change Your Ratio of Stocks vs. Bonds
It’s not wise to change up your 401(k) too much, but from time to time, review your allocation of stocks versus bonds and make adjustments as needed. Remember that stocks are more volatile than bonds. Yes, their reward can be heftier — but so can their risk.
What’s the best ratio to shoot for? One way of deciding upon stocks versus bonds is to subtract your age from 100, 110, and 120. Let’s say you’re 30. Your results would be 70, 80, and 90. In other words, you could probably get by with 70% to 90% stocks and, correspondingly, 10% to 30% bonds. As you celebrate birthdays, you may want to bring up your bonds and take away some stocks to give your portfolio a more appropriate, conservative balance.
Revisit Your Beneficiaries Periodically
Whenever you have a change of life, such as getting married, having children, or separating from a spouse, revisit your 401(k). You may have named beneficiaries who would be eligible to receive your funds at maturity if you’re no longer around. It’s essential that you stay on top of your beneficiaries because you could get in trouble otherwise.
Consider a scenario where you get a divorce from your first partner and remarry a few years later. If you don’t name your new spouse as your beneficiary, your former spouse would get your 401(k) funds instead. Don’t assume this can’t happen. It occurs more often than you might think and almost always causes hardships in families.
Know the Fees You’re Paying for the 401(k)
Chances are good that you’re going to pay fees for your 401(k). It’s best to know the fee arrangement upfront. Ask your employer to provide you with all the fee information. Then, stay on top of your statements.
Many 401(k) providers now offer you the ability to check on your 401(k) health in real time online. Be sure to log onto the portal regularly so you’re not surprised by anything. Notice a fee you weren’t expecting? Ask your company or the 401(k) partner your company uses. It never hurts to ask questions. The more you know about your 401(k) and the fees you’re paying, the better you’ll be.
Avoid Cashing Out When You Switch Jobs
It’s very common for workers to move around from job to job. Most people don’t earn gold watches anymore for 30 or more years of employment with the same organization. When you resign, you may be offered the ability to cash out of your 401(k). Don’t. Take it with you.
What if your new employer doesn’t have a 401(k) plan that you can automatically roll into? Talk with a financial advisor about setting up a 401(k) plan or IRA of your own. That way, you won’t lose the money or tax benefits you’re getting. And you can keep growing your nest egg without interruptions.
Check Other Investment Vehicles
Once your 401(k) is in place, you might be tempted to sit back and expect a cozy old age. Why not think about investing in other areas, too? The more money you put toward the future right now, the more you’ll have when your cake features 70 candles.
Other retirement investment possibilities include annuities, stocks, and even certificates of deposit. By spreading out your wealth over many vehicles, you’ll lower your risk. At the same time, you may find that one vehicle outperforms all the rest. In this case, you could allocate more dollars there as desired. You may be surprised at how comfortable you get with investing after a few years!
It doesn’t matter if your college degree ink isn’t dry or you can’t even find your college diploma anymore. You can always do a little better in terms of making sure your 401(k) aligns with your retirement goals.
On the date of publication, John Rampton did not have (either directly or indirectly) positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
John Rampton, the founder and CEO of Due, is an entrepreneur and connector. While recovering from a serious construction accident when he was 23, he studied how to make money work for you, not against you. He has since written many articles about finance, entrepreneurship and productivity.