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Making 401 (k) contributions is often an investment in autopilot, which can be a good thing. You are averaging costs in dollars, which means you are automatically investing regularly, whether stocks are going up or down. Because you are funding a 401 (k) through payroll deductions, you probably don’t even miss the money you invest.
But you don’t want to go full hands-free with your 401 (k) plan. Checking in from time to time will help ensure that you choose the best investment options and that you are on track to meet your retirement goals. Here’s how to take a quick review of your 401 (k) in 2021.
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1. Verify the beneficiary
Even if you have a will, it is essential to make sure that the beneficiary you have designated for your retirement accounts is still the person who should receive the money when you die. Beneficiary designations replace wills. This means that if the beneficiary listed on your 401 (k) is someone you divorced ten years ago and your will says your new spouse gets all of your assets, your ex-spouse will still get your 401 (k) money. ).
While the New Year is a good time to review your beneficiaries, it is essential that you update this information whenever you encounter a major life event, such as a marriage, divorce, or the birth of a child.
2. Estimate your retirement goals
It is difficult to predict your retirement needs, especially if you are 20 or 30 years old. But financial planners generally recommend replacing about 80% of pre-retirement income. Even if your golden years are decades away, use a retirement calculator at least once a year to estimate if you’re on track to meeting your goals. As you get closer to retirement, it will be easier to plug in more precise numbers, as you will have a better idea of how long you want to work and when you plan to claim Social Security.
3. make a catch-up plan
If you fail, the sooner you can start saving more, the easier it will be to catch up. Make sure you get the full match for your 401 (k) business. Beyond that, look for ways to save more, even if you can only afford to invest 1% or 2% more of your salary. If your 401 (k) plan’s investment options are limited, you may want to contribute only the amount you need to get your full match and then invest the rest using an individual retirement account. (IRA).
In 2021, you are authorized to contribute:
- Up to $ 19,500 for your 401 (k), plus an additional $ 6,500 if you’re 50 or over.
- Up to $ 6,000 to your IRA, plus an additional $ 1,000 if you’re 50 or over.
4. Review your risk tolerance and asset allocation
You never want to drastically change your tolerance for risk in response to short-term market fluctuations. But reviewing the level of risk you take with your 401 (k) once a year is a good strategy. If you’re terrified of a stock market crash or getting closer to retirement, you’ll want to shift some of your holdings from stocks to bonds, even if that means lower returns. Or if you are worried that your money is not growing fast enough, you will turn to stocks more, even if it means taking more risk.
The rule of 110 can give you a good estimate of what your allowance should be: subtract your age from 110 to get your proper stock allowance. So a 30-year-old would aim for 80% stocks and 20% bonds, while a 50-year-old man would want 60% stocks and 40% bonds.
5. Make sure your fees are low
Review your 401 (k) fees each year to make sure that the costs of investing are not eating into your returns. Many plans offer target date funds that automatically rebalance based on your age and expected retirement date. Handy, yes, but the average expense ratio is 0.51%, which means $ 51 of a $ 10,000 investment is spent on expenses.
Many plans also offer passively managed index funds with an expense ratio of 0.1% or less. It doesn’t seem like a huge difference, but if you invest $ 5,000 a year and get a 6% annual return, reducing your expense ratio from 0.51% to 0.1% would leave you with almost $ 30,000 more at the end of it. 30 years old.
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