6 Tips for Managing Your 401(k) Like a Pro
April 1, 2021
Nick Fortuna
One appealing aspect of a 401(k) account is that it requires little time and effort to manage. As long as workers contribute as much as they can afford—or at least enough to garner any company matching contribution—to a diversified portfolio over many years and avoid early withdrawals, they should reap the benefits of compound interest and build a substantial sum.
But if you put in a little time and effort, financial advisors say, you can minimize expenses, bolster returns, and minimize future taxes. Here are some best practices advisors recommend:
● Don’t automatically opt for target-date funds. Target-date funds, often a default option for savers who don’t select investments, have grown increasingly popular with 401(k) investors because they automatically shift assets from riskier to more conservative investments as workers age. But Fuchs says these funds aren’t right for everyone because they treat all investors the same.
Investors who will have other sources of retirement income, such as pensions, a spouse’s income, Social Security, and brokerage accounts, may not need much of their 401(k) savings early in retirement, he said. “Everything is based on the timeframe of when you want to use that money,” Fuchs said. “As long as I’m not touching that money, I can let it grow.”
One option for older workers is to have most of their existing savings in bond funds and other conservative investments while allocating all future contributions to stocks, according to Alex Reffett, co-founder of the advisory firm East Paces Group. This approach ensures that workers nearing retirement won’t be badly bruised by a stock-market crash, and if one does occur, their future contributions will be used to buy low and hopefully sell high, he said.
“Your future dollars don’t have to be invested the same way as your existing balance,” Reffett said. “You may want to be more protective of what you’ve already saved while still taking advantage of a potential dip in the market by boosting the aggressiveness of just your future dollars.”
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