As retirement planning specialists, we frequently have clients confess their shortcomings regarding investing. Be it lack of focus or discipline or ignorance regarding the investments they currently hold – we know many investors aren’t particularly knowledgeable about the underlying features relating to their retirement savings accounts. Starlight Portfolios aims to help you understand what you’re investing in, where you’re invested and why the particular investments are best for you.
The following list overviews seven of the most often committed sins of 401(k) investing. There are of course many more, however, the following pose the greatest threats to achieving a successful retirement.
1. Maintaining unnecessary fees.
Is your 401(k)’s growth hampered by fees, such as those charged by high-cost investments? High fees can eat away at your retirement savings, requiring more time and money and possibly delaying your retirement date. If you don’t know how much you’re paying in fees, it’s time to discuss with your plan administrator. When analyzing your employer’s retirement plan, consider the following rule of thumb: evaluate both the return on the investment and the associated fees. A high performing fund could have a lesser benefit to you if it has high fees that chip away at the growth.
2. Attempting to predict market performance.
It’s generally a bad idea to chase the market, or even worse, anticipate changes in the market. There are highly experienced professionals who do this, and even they miss the mark at times. In creating your retirement plan, keep a long term perspective instead of giving in to reactionary responses. You can’t control the performance of the stock market, or your investments. However, you are in charge of those things that are most influential to the building of your nest egg: the amount you invest, management of fees, and diversification. Focus most on those things that you can control while making adjustments with a long term frame of mind.
3. “Set it and forget it”
Through changes in career, age and financial priorities, your retirement plan will need ongoing adjustments. The “set it and forget it” mentality works for rotisserie cooking, but no so much with the success of your 401(k). Though your plan sponsor holds fiduciary responsibility to “examine periodically the prudence of existing investments” per ERISA rules, you also hold a responsibility to your overall retirement savings by periodically reviewing your plan, increasing your participation as your budget allows, and rebalancing in order to maintain growth and meet your risk profile.
4. Guessing which investments are best for you.
Retirement planning is all about time – time to retirement and time in the market. It’s also about the time you take to manage investments, such as your 401(k). It is of course prudent that you participate in your company’s retirement plan, it’s also wise that you research the investments available to you. This knowledge is not only peace of mind but will increase your ability to properly manage your retirement plan’s progress.
5. Neglecting the match opportunity
Are you amongst the 23% of employees who don’t take advantage of their employer’s matching contribution? Think about it this way, you’d think it a good deal if your employer said, “Give me $10 and I’ll give you $20 in return”. Think about your company’s matching opportunity in the same way, because you are leaving money on the table that could work towards increasing your retirement nest egg when you neglect to meet your matching requirement. If for financial reasons, you can’t meet the requirement, make it a goal to make the applicable percentage as soon as reasonably possible.
6. Using your 401(k) as a bank account.
Yes you make deposits (contributions), and yes you can make withdrawals (loans) from your 401(k) account, but your 401(k) is an investment account directed towards contributing to your retirement savings. When you borrow or withdraw from your 401(k) you are inhibiting returns and taking from performance. And on top of that, loans from your 401(k) result in additional costs such as paying interest on the amount taken, possible early withdrawal penalty of 10% and income taxes. It’s costly to borrow and withdraw money from your account. If this is something you’re considering, get a clear picture of how much you’ll need, how much it will cost you, and less costly options that might better meet your financial needs.
7. Putting off tomorrow, what you could do today.
If ‘necessity is the mother of invention’, what’s procrastination? It results in loss opportunities. In the realm of investment, it results in loss money. Yes, you do have to forego money in the interim for a future return. But if you want to retire, that’s the plan. Again, if you can’t afford to contribute to your company’s 401(k), it’s in your best interest to come up with a plan to get to contributing as soon as possible. A successful retirement is only possible with careful planning. It’s a long term process and requires a long term plan and periodic tweaks and reviews to make sure your retirement savings will meet your retirement goals.
At Starlight Portfolios, we build portfolios based on an efficiency balance of projected returns and fees charged. Our job is to improve your retirement plan with sound investments that don’t charge you an arm and a leg. We also give you access to tools, resources, and support to help you assess your current financial picture, prioritize your objectives and achieve your financial goals.