If you have an employer-sponsored 401(k), there are some steps you may wish to consider to maximize your returns and hence enhance your retirement. While you do not need to be a financially oriented person to take advantage of these steps, you can always seek the advice of a qualified financial advisor if you need assistance. But first, you need to be taking advantage of what your employer offers and participate in their 401(k) plan.
Always Give Yourself a Raise
Most people may sign up for their 401(k) plan or maybe automatically enrolled, and that is that. They never think about what they are contributing to again or what they may be investing in within the plan. While many people are in this position, there is a simple thing that you can do to ensure you are making the most out of your contributions, and that is giving yourself a raise. How do you do this, you may ask? On an annual basis, raise the amount you contribute by a set percentage. That means if you are contributing 5% this year raise that to 5.5% or 6% next if not more. The ideal time to do this is when you receive a raise in your salary. That way, you do not miss the extra percentage you are contributing to your account.
Be Aware of Fees
Fees can destroy the return on your 401(k) account. And let’s face it, most plans are not selected with the fees that its participants pay but rather the compensation of the salesman who sold your employer the plan. While plans should have the best interest of the participant in mind and many lacks on this fiduciary responsibility. 12B1 fees are disclosed on about the fund you are investing in and cover things like administration and the fees geared towards the salesman to pay their commissions and salary. Most funds have these fees, but not all funds are the same in the amount they charge in 12B1 fees. And yes, these fees can affect your portfolio’s return as we will examine a little later.
Rid Yourself of Poor Performing Funds
Yes, excessive 12B1 fees can hinder the fund’s performance, but some funds are poor performers plain and simple. But you must also be aware that the fund selection within your plan is limited to what your employer wishes to include and what the salesman sold them. Some 401(k) plan administrators have fees and costs in mind and actively keep these expenses as low as they can by using low-cost funds such as T. Rowe Price or Vanguard. If a plan administrator follows the role of a fiduciary, they should include several different low-cost funds for you to select from. Many low-cost funds are passively managed and will have lower fees than those of actively managed funds. And these lower fees are one reason the indexed fund performs better. Being an indexed fund also means less in the way of trading fees, taxable events, and management fees for analysts.
If your plan is made of funds with high fees or poor performing funds, there is a simple solution for you as well. While I do not know each of your particular situations, I would recommend for someone in this position to maximize their 401(k) plan to the point that they no longer receive a company match. This is free money from your employer where they match a portion or all of your contributions with company funds giving you an instant return. If you do not take advantage of this free money, you are only hurting yourself even if the funds are not the best that is available. Then once you have reached the point where your company no longer will match your contributions, I would suggest you invest in an Individual Retirement Account or IRA outside of your place of work. The plans have certain restrictions and limitations that you will need to evaluate before investing, but they offer you more of selection for investing purposes.
Become Rich via a 401(k)
If you are in your twenties and just starting your career and can save $500 a month, you are well on your way to having a nice nest egg at age 60 when you are close to retirement. And if you work until your full retirement age of 67, you will even be ahead. In this part, we will examine an individual who is age 25 and starts saving $500 a month until they are eligible for early retirement at age 62, earning a modest 7% annually. In this situation, they will retire with a balance of approximately $1,050,000, making them a 401(k) millionaire. But what if they had a plan that had higher than average fees and they averaged a 6.5% return instead of 7%? They would still do nicely but would miss the millionaire status and have approximately $929,000.
Okay, that has your retirement at age 62, but what if you worked the extra five years and retired at age 67? In that case, your $500 a month investment at a 7% annual return would give you approximately $1,530,000 and at 6.5% a balance of approximately $1,320,000. Notice that in these examples, we do not do as we advocated in the first bullet and that is to give yourself a 401(k) raise. Had you done incremental increases in your contributions you could amass even more in your account.
Yes, reading the fine print of the funds can be daunting and to a large degree confusing as well if you are not comfortable doing this on your consult a Registered Financial Consultant (RFC) for assistance. Ideally, you should be able to find an RFC that charges an hourly fee to assist you in your financial endeavors.
If you need additional information feel free to contact me directly on the site or send me an email at kirk@kgmeyerpc.com. To join our email newsletter, fill out the form below.
