You’re a hard-working millennial in your 20s or 30s and you have an employer-sponsored retirement plan going, so you are saving for retirement. Well done!
Imagine this common scenario: Just after orientation with your human resources department, you decided to log into that fancy retirement account. But, after you set your contribution, the rest of the stuff was … overwhelming. Terms like “employer match” and “target-date fund” didn’t fully make sense to you. So, you may have made a mental note to Google them and said you’d get back to it, eventually.
Well, eventually has finally arrived. It’s great to have some kind of retirement game plan going — especially when you’re just getting started in your career — but to make the most of the money you’re stashing away for your gray days, you’ll need to fully comprehend what’s going on with your investments.
What to look at when you log into your retirement account
Everyone reading this may see something different when they log into their retirement account, and that’s totally okay, as these tips generally apply to all retirement accounts accessible to customers via an online portal.
“Every provider has a different website and some of them are very easy to navigate and some of them you kind of have to dig around a lot,” said Crystal Rau, a certified financial planner with Beyond Balanced Financial in Midland, Texas.
You may immediately see a landing page with all of your information and an easy-to-adjust contribution scale. Or, it may be like navigating a labyrinth.
Your contribution rate
First thing’s first, see what you’re working with. Check your contribution rate so that you’re clear on what’s being put into the account in the first place.
Your contribution rate is the percentage of your salary that goes toward your retirement account. The more you contribute, the more you will (hopefully) have in retirement, but you’ll have less money per paycheck to play with today.
It’s important to know how much money you are currently contributing so you can set it to match your savings goals or make adjustments as necessary.
How much you should be contributing: 10% … or more.
General rule-of-thumb advice is to aim to put 10% of your income toward retirement. But you can be more aggressive than that. Rau says you should aim to put 15% to 20% of your income into the retirement account, especially when you are young.
“If you learn to live on less in the beginning, as your salary grows over the years, you’re going to be used to living with that percentage gone already because you’re used to saving it,” explained Rau.
Justin Harvey, founder of Quantifi Planning, a Philadelphia-based financial planning company says “Ten percent is a good savings rate … but if you can save 20%, 30%, I’d say do it because the more you can save and the quicker you can do it, the quicker you won’t be beholden to an employer.”
The best strategy for maximizing your retirement account, he suggests, is to pick a number as high as you can stand that would allow you to still pay your bills every month.
Your employer match
Always look to see if your employer will match the amount you place into your retirement account.
“I always say as a general rule of thumb try to max out at least what the employer will match,” said Reshell Smith, a certified financial planner for AMES Financial Solutions, a virtual financial planning company based in Orlando, Fla. “Anytime you have an employer match and you are not getting it, that’s like leaving free money on the table.”
If an employer match is not shown on the website, Smith recommends checking your monthly statement for the information, or simply asking the person in charge of benefits in your company’s human resources department.
To make sure you don’t leave any free money on the table, use the matching point as a gauge to set your contribution level. Make sure you are at least contributing the amount you’d need to take full advantage of the match.
For example, some companies may match something like 50% of your contribution up to 5% of what you contribute from your salary. So in that case, you would want to set your contribution at 5%, to get the entire employer match.
“Those are free dollars that are essentially equivalent to earning 100% in the stock market. As you know you, can’t really buy a stock and guarantee a 100% return,” said Harvey.
After that’s accomplished, work upward in your budget from the match point to see how much more you could be putting toward your golden days.
Investor or asset allocation quiz
Sometimes, your provider’s website will offer employee resources like a risk tolerance or asset allocation quiz, says Rau. You can take the provider’s quiz or others provided online like this one from Vanguard, or read this guide from Principal to get an idea of how your cash should be distributed among different types of investments available to you. This is also known as your asset allocation
How risky should I be?
Your risk tolerance in investing refers to the degree of variability in investment returns you are able to withstand. Younger investors generally have a higher risk tolerance level because they have more time to absorb volatility in the market, so they may be more aggressive investors, whereas older investors may want to practice more conservative investing to protect their retirement funds.
But, that’s generally speaking. Depending on your personality, investment experience, time horizon and financial situation you may be more or less risky of an investor. Choose allocations based on what’s best for your needs.
Your investment or asset allocation
If you see a pie chart or some other chart with categories, take a look at it. It may give you an idea of your current asset allocation. The allocations you see will likely be a mix of equity (or stock) and fixed assets (bonds and cash). The pie chart won’t get into much detail beyond the general labels, but it will show a general breakdown of where your assets are sitting at the moment.
“Look at your pie chart or your breakdown and just make sure the allocation is appropriate for your risk [tolerance] level,” said Smith.
Why should you care about your asset allocation?
Your asset allocation is a window into how aggressive or how conservative you are being with your investments. If you’re heavily invested in stocks and you’re nearing retirement, you’re probably taking on too much risk and should shift more of your savings into conservative investments like bonds. If you’re young, however, you’ve got decades ahead of you to take risks and it’s typically advised that younger workers take an aggressive, stock-heavy approach to their allocation.
If you’ve never touched your retirement account, but you’re contributing, you may be surprised to find your funds may not be growing as you believed they were.
“More than likely, the contributions are going to default to a money market account, which is basically like a savings account,” said Rau. “There’s zero growth and so not taking action and choosing investments, you’re basically just putting your money in a glorified savings account.”
In some cases, retirement funds will automatically put you into a target-date fund, which is actually a nice way to start investing, especially if you’re not confident in choosing your own asset allocation yet.
A target-date fund is a mutual fund comprised of mixed investments you choose based on your age or the year you intend to retire. If you’re not familiar with investing or how to choose investments, a target-date fund may be a good option for you.
“The target-date funds are the easiest because the investments are chosen for you. They are rebalanced for you so that is the easiest way,” said Smith.
As you age, the fund’s assets will automatically be rebalanced to become more and more conservative.
Not sure what your ideal mix of stocks versus bonds is? Take your age and subtract it from 100 (or 110 if you’re more aggressive). The bigger number is how much you should allocate to stocks. The smaller is how much you should allocate to bonds.
If you take the asset allocation quiz, you may have a better understanding of the right mix of investments for you.
Fees on your investments
Investing isn’t free, because there are massive investment firms behind them pulling the strings. Some do more pulling than others, and they charge for that extra management. On the other hand, passively managed funds can be much less expensive.
The different investment options you’ll see in your 401(k) plan page each should come with information about fees. The key fee to look at is your expense ratio — the annual fee funds charge their shareholders to operate the mutual fund.
“Anyone that has a computer they should get into a website like Yahoo! Finance and type in that fund name and one of the first thing that pops up is an expense ratio,” says Rau. “Anything over 1% is more on the expensive side. Really expensive would be over 1.5%.”
Rau says the expense ratio isn’t the most important thing for new investors to pay attention to, but it’s something new investors should be aware of since it could cut into their overall return.
If you pay a 1% annual fee on your return and your fund averages 7% a year, for example, you would technically earn only a 6% return overall, instead of 7% because you’re having to account for those fees. She recommends choosing a fund with an expense ratio below 1%, closer to 0.7 or 0.8%.
You can get much lower fees that even that by choosing low-cost mutual funds, which aren’t actively managed by an investment firm and are much less fee-heavy.
Do an annual checkup
Don’t let this be the last time you check your retirement account until you either retire or leave your current employer. Check up on your funds at least once a year to see how it’s performing and consider rebalancing your allocations.
“If you’re in anything other than a target date fund whatever allocation that you set I would revisit it once or twice a year and rebalance back to that original allocation that you had,” said Rau.
For example, she added, “Over six months to a year if your stocks performed really well, your new allocation may be 90% stocks and maybe 10% bonds.”
Rau advises revisiting your account once or twice a year so that you’re not taking on more risk than you originally intended.
But, avoid rebalancing too much.
“There is an illusion that when you are trading stuff you’re going to increase your performance, which is false, says Harvey. “The stock market is going to do what it’s going to do. Look at it periodically, check your quarterly statements, if you’ve got a good strategy stick to the strategy.”
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