401K bLOG pIC

The US stock market is finally getting a breather from one of the worst starts in history. In typical fashion, the dramatic decline is now being followed up with a robust recovery.  Since the market bottomed February 11 the major indices have rallied big time as noted below:

DJIA added 2864 points or 18% to 18,524

S&P 500 added 352 points or 18% to 2,181

NASDAQ added 958 points or 22% to 5,224

8.9.16 ^SPX_^DJI_^IXIC_chart

The challenge facing investors is if this bounce is indicating the fears that prompt the dramatic selloff is gone or if this is merely traders taking advantage of an oversold market for short term gains. Our view is the latter because economic conditions have not improved at the same pace the market has rallied.  The proof of improved conditions will be evident in increase corporate earnings that have been in a downward trend since June 30, 2005.

The concept of money is emotional, provocative, and powerful. It can make us feel empowered and accomplished or defeated when strategies don’t work out as planned.  Money is a taboo subject in which families and friends don’t discuss their personal affairs and especially when facing financial challenges. Some let years of financial stress affect their emotional well being. If this is you, the good news is there is a plethora of resources to help you manage and guide you on your journey to build wealth and retire financially independent.

In this blog we focus on your number one asset at retirement – your 401k account.  IF you implement the following steps, it can make a HUGE difference in the quality of your life at retirement.

The first overall point is building wealth a proactive sport.  You cannot ignore your 401k account for years or decades and expect to reap the bounty of long-term investment return.  Professional investors monitor their accounts daily and some by the hour.  Most 401k plans have mutual funds that are professional managed portfolios that reduce your need to monitor the account daily.  However, it is critical you implement the following to maximize your potential return and minimize losses:

Desk and computer

Create your 401k retirement file folder

Even though all data is available on the website, employers change their providers at which point all former data is deleted.  So to keep a consistent track of performance and values you need to print out each quarterly statement.  Also, if you change employers, you will also lose all past information so again the importance to print your statements.  Also, in your 401k file folder should be retirement plan provider contact information including website address, phone, account number, extension numbers of helpful representatives which are not always easy to find on statements. In this folder, you should also keep your beneficiary form you submitted to the employer, any payroll information, and plan change announcements.  Last point, if you are married or have significant other(s) this folder will be very resourceful should you be incapacitated or worse.

Evaluate your account

Evaluate the funds you own and how much they fluctuated for various periods. Most importantly note how each fund correlated with their respective indices (e.g. bond index to bond funds, S&P 500 to growth funds, etc).  Not all growth funds are the same, and those that fluctuated the most will probably remain vulnerable to more volatility should market conditions deteriorate. We have observed in prior blogs and podcasts that small cap, mid-cap, and international funds along with sector funds like emerging market, technology, healthcare, financials and precious metals can provide superior returns over major indices but at the same time can decline more during less favorable market conditions.

Take action

If you are not comfortable with the amount your account fluctuated this year or performed compared to the market, then outline on your statement the changes you are going to make.  If you have internet access, make the changes before you leave – don’t leave it for some other time.  Also, we advocate using target date funds as a core foundation holding for your account (50% – 70%).  It is easy to change the risk level of your entire account by simply changing the target date fund from less growth to more growth.  We have discussed the value and structure of target date funds in past blogs and updates.

Don’t stop contributing

One knee jerk reaction typical during times of high market volatility is participants stop contributing to their retirement plan.  If you are not comfortable with market conditions or feel unfamiliar with your 401k fund options altogether, then select the cash account or a conservative target date fund until you have a chance to meet with or speak to the plan’s investment advisor.  Contributing to your retirement account is one of the most efficient savings accounts in regards to taxes and fees. The IRS only allows us to contribute $18,000.00 (not including employer match or profit sharing) to our 401k’s for a reason! Building your account balance is a slow process but with potentially significant rewards when market conditions improve.  Also, make sure you are contributing at least the minimum amount required to qualify to receive 100% of the employer match.  For example, if the employer match is 50% up to 4% of contributions, then you should at a minimum be contributing 4% of payroll.  We see many times employees contributing less than the minimum leaving employer matching dollars on the table.  Find out what the employer matching requirements are and make the necessary changes to receive all the employer is willing to give to you.

*Bonus Round*

If you have multiple 401ks from previous employers, consider rolling them into your current plan. Before doing so, consider the performance and fees between the two plans. Managing your account from one login can be much more efficient than from 5. Most 401k plan providers have similar fund selections and fee structure, so there is a minimal benefit having your retirement funds with former employer plans.  Also, any money you have in former employer plans are not available for loans or partial withdrawals.

*Double Bonus Round*

Many retirement plan provider websites have excellent financial and retirement planning software available for free.  You simply complete the input pages and projections of future account values and retirement income are calculated for you.  Some sites offer more extensive planning tools.  During your personal appointment, spend time navigating around the site to learn about all the tools available to you.

That is it!  If you follow these simple steps each quarter, you will be more informed about your retirement and rest easier at night.  With a proactive strategy and regular contributions during your career it very possible you can become a 401k millionaire!