401k plans Archives - The Free Financial Advisor

Part of planning for financial freedom is making sure that you are financially protected when you hit retirement. However, only a few know how to maximize their 401(k) in a retirement investment account as part of their overall portfolio.

If you want to explore the basics of investing your 401(k) to increase your retirement benefits, no worries. This article provides you with a summary of the five (5) most useful tips on how your 401(k) can help you retire with more financial security.

What are 401(k) Investments?

Before going into the details, you should know that a 401(k) investment is basically a retirement savings tool sponsored by your employer. This tool allows you to invest a portion of your paycheck into a retirement investment account. Your money will grow tax-free until you are retired, and that’s when you can use it.

The question that many ask is about the portion: how much of one’s paycheck should go into this retirement investment? In addition to that, here are some tips about putting a part of your paycheck to your 401(k) investments.

Invest Early

It is true that you can begin your retirement investment later when you are older. However, the earlier you start investing, the better. In fact, it is best to start contributing to your 401(k) as soon as possible. In doing this, you earn more. That’s just how compound interest works: you gain more interest when you start earlier. If you are a young worker, you have the advantage of the time that older folks will never ever have. Invest early.

See How Much You Can Set Aside

As a rule of thumb, you need to invest a percentage of your earnings that is equivalent to the difference between 100 and your age. For instance, if you are 20 years old, you need to invest 80% of your earnings as savings or into your retirement fund. This is based on the assumption that, at an early age, you still don’t have many responsibilities and can afford to invest more money.

If that amount or percentage is too high, you can decide on a fixed annual amount. For example, you can contribute a max of $19,500 to your 401(k) in 2020 if you are under 50. All you have to do is calculate a fixed amount below the threshold of $19,500.

Hire a Portfolio Manager

Still unsure or want to maximize your investments? You can explore other options such as using a robo-advisor such as Wealthfront or Betterment. This is one of the best options for someone who is unsure or does not know how much they should invest.

The robo-advisor will run the numbers for you to determine the best combination of investments in your 401(k) fund. You can set the target amount you need for retirement and the algorithms will compute how much you need to set aside every month or year so that you can have that amount when you retire.

Match Your Employer

Another way to determine how much you should contribute in your 401(k) is to look at how much your employer is contributing. For instance, if your employer only offers a maximum of 10% of your salary, then you should match your employer and contribute at least 10% as well to get the most out of your 401(k) investments.

Check Investment Types

When you contribute funds to your 401(k), you have to choose which investments it goes to. With each kind of investment, there is a specific percentage of return based on the risk profile. Since the percentage of return is different for each investment, your choice will affect how much you need to contribute in the 401(k) so that you can reach your target retirement funds.

If you have enough in your 401(k), before you start computing, consider the types of investments that you will choose. For instance, if you choose to invest in the stock market, you will earn more and faster but the risk is higher. If you want to do this, you might want to invest a lower amount.

On the other hand, you will have more stable returns if you invest in mutual funds. However, interest will be less so you want to contribute a higher amount to achieve the retirement fund levels that you want.

Takeaways

For dignity and independence, you want to retire with enough funds so that you won’t need to depend on help from your children or other people. With the investment tips summarized in this article, you can think about your best options to save and invest money in your 401(k) for your retirement. The five (5) points summarized in this article should help you begin to find the answers to all your basic questions and concerns.

For more great articles from The Free Financial Advisor, consider these:

Financial Planning Basics – The Financial Pyramid

How Long Should You Keep Financial Records After A Death

What Advantages Are There To Saving Money In The Bank?

How To Recover Paystubs From Your Old Job

I know sometimes I might sound a little cranky (like yesterday, for example). But here’s a good reason why….I can’t make this stuff up.

Some back story:

As an advisor, one of the most common requests I’d receive was to help someone choose which funds to pick inside their workplace retirement plan.

Most companies have one – either a 401(k), 403(b), SEP, SIMPLE, or something… Each of these plans was sold to the company owner by a salesperson financial advisor.

Who picks which funds are appropriate to include in the account? Who makes the (hopefully) long list of choices you and I can oogle while we decide which is best for your retirement? The owner chooses, but she is handed a list by the salesperson financial advisor. 99 percent of the time, the owner doesn’t hav the time or inclination to second guess the choices, so they accept the “professional” recommendation. If you work for a large corporation…then who picks the funds? A committee…combined with the salesperson financial advisor.

What happens when your 401(k) fund choices just plain suck? Do you have any repercussions?

Apparently, you do. And this is where our story begins……

At Ameriprise Financial, (they’re a middle-of-the-road financial “planning” firm) employees are eligible for their own 401(k) plan. One of the nice bonuses for those working in the industry, is that you may happen to have an in-house mutual fund department. Ameriprise does. Awesome! And, you may have your very own retirement plan operation. Ameriprise does. Cool beans!

When you sell funds for a living, you would suspect there’d be awesome choices in your plan…right? You’d skip to work every day, whistling with joy and pinching yourself that you work for the company that knows how to deliver the bacon when it comes to retirement plans. It’s kind of like owning the golden goose.

But it isn’t.

According to Nathan Hale at CBS MoneyWatch, Ameriprise funds inside of the Ameriprise 401(k) suck SO BAD that employees are SUING the company to get out.

Wait. Did I read that correctly?

Financial advisors are suing their own company for forcing them to eat their own cooking? HA HA HA HA.

That, folks, is the definition of irony.

It may also be why Joe’s had a case of the crankies.

This is specifically why planning your own future is non-negotiable. If you want to achieve your goal, know what you’re doing yourself. It’s okay if you need to hire an advisor, but don’t just hand them the keys to your car, jump in the back and expect to reach the place you want to go!

Do your own homework. In this case, the stuff that’s peddled by these salespersons financial advisors is so atrocious, they wouldn’t own it themselves (the cynical part of me thinks they might still sell it to their mother, though, if there’s a bonus in it).

Don’t let a salesperson tell you to “stay the course, Mr. Smith. It’ll be OK” if it clearly isn’t the case. Over the next several weeks, I’m going to show you some of the cool tools you can use for FREE on the internet to do your own homework. Even if you have an advisor, you should know how to double-check her work.

That should be exciting, huh? For now, I’m going to keep giggling to myself about this story.

Investment Tips: How much should I have in my 401(k)?