9 Steps to Master Your 401(k)

Categories: Plan, Retire

Your employer-provided retirement plan (e.g., 401k) is one of the most important pieces of your financial plan — yet it is often misunderstood and under-utilized. Master your retirement plan to retire early, on time, and achieve financial success. During this time of year, either 4th quarter or the 1st quarter of next year, your company will have their annual 401k meeting. These 9 steps will help to prepare you for making good decisions.

  1. Obtain a written financial plan: Call a financial planner or obtain a written plan online to organize all of your financial affairs and plan for the future. People don’t plan to fail, they fail to plan! The best way to make financial decisions is in the context of a financial plan, which will help guide you simultaneously through all the moving parts of your finances. That way you will make more informed decisions about when you can retire and how much you should contribute, while still making good decisions about all of the other areas of your plan. A plan helps you avoid neglecting one area because you focused too much on another area. A financial plan will also help you spot trouble areas, such as too much debt, and will provide suggestions to improve your overall situation. www.eFinPLAN is good online solution.
  2. Obtain information: Round up all available information and put it into a file folder, such as current account statement, investment account information describing what you have chosen and options that are available to you, contribution information that describes how much money your employer will contribute (match) and how much you can contribute, and beneficiary information.
  3. Know your employer contribution amount. Some employers contribute a set dollar amount on your behalf to your retirement plan; they may also contribute based on a matching formula. For example, they may match 50% of your contribution up to 5% of your income. Some employers may do both.
  4. Sign Up Now. Participation rates are only about 70% — down about 5% from a few years ago. If you have passed the waiting period and are eligible to sign up, do so today.
  5. Contribute enough to receive the full match. Only ¼ of employees take advantage of their employers’ matches. Doing so leaves money on the table. Your employer has a several thousand dollar raise waiting for you, so take advantage of it.  At the very least, contribute the minimum amount so as to fully exhaust your employer’s match. After you have done this, begin contributing more than the match minimum.
  6. Don’t borrow or withdraw.
  7. Start early. The average 401(k) participant with 11 years of tenure and 20 years until retirement (65) has accumulated only about $60,000, and the median total average plan balance is only about $27,000. Many workers in their 20’s do not take advantage of employer-sponsored retirement plans, thinking that retirement is too far off to think about. However the earlier you start, the longer you have to take advantage of the magic of compound interest.
  8. Make wise investment decisions. You may have done all of these things, but don’t neglect this vital issue. Many people invest all or a large percentage into a fixed or money market account, either out of fear of risk, lack of investment knowledge or procrastination. Review the investment information provided by your plan. Determine an asset allocation that matches the level of risk that you are comfortable with and appropriate for your age and expected retirement age.  If you have a financial plan check the investment section for the asset allocation model that fits your level of risk. Also discuss this with your investment advisor or Plan Representative regarding account selection.
  9. Don’t give up. You may feel that even after doing all of these things your plans for retirement are still off track. Don’t worry. Feel good that you have completed as many of these steps as you could. Stay focused on your overall financial plan; by making improvements each year, you will accelerate your progress.