If you have worked for twenty or thirty years, you may remember the glorious days of pensions. You put a certain amount of money in an account and when you retire, you begin to receive checks. Apart from continuing to work to accumulate more retirement funds, there are not many management responsibilities.
That was then. Today, everything is about 401 (k). You are now responsible for your retirement. A portion of your salary, usually accompanied by a little incentive from your company, goes into an account, and you, a person with little investment knowledge, are responsible for managing the most important financial instruments you have. Does it look a little scary?
Let's build some foundations to help you manage your 401 (k). With the right basic principles, you can make better decisions about your personal financial situation.
1. Do you have to pay the account management fee?
If you meet the minimum balance requirement, many financial advisers are willing to manage your account. There are also online services that can help you make good financial choices, even if your balance is small.
According to the 2014 report issued by Financial Engines Inc., a retirement investment company, the return on assets managed by professionals is on average 3.32% higher than that on accounts not managed by professionals. Interestingly, when a professional manager can charge you 3% or more of your account balance. Some online services may charge only 0.15%.
Generally speaking, if you don't have much investment knowledge, it's worth helping. However, some 401 (k) programs offer free advice from professionals or may give you a model portfolio. Don't pay until you know all your options.
2. Contribute the most to the competition
If your company matches your contributions at some point, contribute as much as possible until they stop. Regardless of the quality of your 401 (k) investment choices, your company will give you free money to participate in the project. Never refuse free money.
Once you reach the maximum, you can consider contributing to IRA, but before the end of the game, it's a very simple way.
Three. You have to rebalance
Would you buy a new car and never change oil? You will buy a house, never mow the lawn, life is full of daily maintenance; your 401 (k) also needs maintenance. In the field of investment, rebalancing is another term for maintenance. As the value of different assets moves up and down, they will account for a smaller or larger proportion of your overall portfolio.
The financial adviser suggested a set of stocks and bonds. If you are 40, you may have 80% of your money in stocks and 20% in bonds. If the allocation is out of balance, you may need to buy or sell assets.
4. Learning the basic knowledge of investment
To evaluate your 401 (k) funds or understand the strange words that financial professionals say to you, you need a basic knowledge of investment. Understand the terms 12B-1 cost, cost ratio and risk tolerance. Read through the information your plan sends you. If you don't know the terminology, please refer to it. (There are more than 14000 terms in the dictionary. Please start here.)
5. Learn to love index funds
Some people like the attraction of stock selection. Finding the next Google or Tesla to return hundreds of percentage points in a relatively short time is exciting, but according to research, gambling usually doesn't work well.
Index funds only follow market indices. A fund after the S& P 500 index rose and fell with the index. No one can guess which stock will perform better than the market. The fees you pay for index funds are almost always much cheaper than those that try to pick the next good stock. A large number of studies show that index funds are also better than actively managed funds in the long run.
In any case, you shouldn't make short-term decisions with your retirement account. If you think you're a Wall Street trader, do it with money other than 401 (k); a plan to build an "egg" is better suited for allocating large amounts of money to index funds.
6. Don't settle only for target date funds
Before you invest your 401 (k) in a target date fund, think about it. The idea of these funds is that as you get closer to retirement, they will continue to grow. For example, if you plan to retire in 2035, you will invest in a target date fund that matures that year. As the target date approaches, fund managers will constantly rebalance their funds to maintain proper allocation.
That's why this may not be the best way: for beginners, funds use different allocation strategies, which may or may not match your goals.
Experts point out that the performance of target date funds depends largely on fund managers. Because you may not know that good managers come from bad ones, it's difficult to choose a fund.
Equally important, these funds tend to be expensive, and novice investors don't understand the golden rule of target-date funds: if you invest in a fund, you shouldn't mix it with other investments. Most financial advisers agree that this is close to an investment that is either wholly or wholly non-invested. Invest your 401 (k) in other funds and give up allocation.
One-stop shopping is attractive, but just because these cars are a simple way to invest doesn't mean they're easy to understand. For more information, see the Target Date Fund Profile and who actually benefits from the Target Date Fund.
7. Don't just rely on your 401 (k)
Your 401 (k) should be one of many retired vehicles. Your house, a sideline, collections and other investment accounts, such as personal retirement accounts, may also be part of your portfolio. When you change jobs, consider whether it makes more sense to transfer 401 (k) from your previous company to your new employer's plan or IRA, which may give you more investment options. Divide your assets across multiple income streams and you may see better returns.
No matter how old you are, you have to play an active role in retirement plans. Sometimes, it's as simple as monitoring your investments after a thorough study of your choices. In other cases, this may mean working with a trusted financial adviser to set long-term goals.
Retirement will be quicker than you think. Whether you're starting a career or entering retirement age soon, put retirement plans first and do so throughout your life.