Take Control of Your 401(k) or IRA Investments

More than HALF of all Americans are at risk of falling short financially in retirement!

Retirement Work Street Sign

That’s according to a recent study by Fidelity Investments. And since the firm oversees $2.6 trillion in retirement funds — more than any other investment firm on the planet — I’d say that makes them experts in the field.

“Americans are falling behind on the road to retirement, with 55% of preretirees in only “fair” or “poor” shape to completely cover essential expenses,” according to Fidelity.

The most common mistake they identify is folks simply not saving enough for retirement.

A good rule-of-thumb is to establish a yearly savings goal of 10 to 15 percent of your annual income, including your 401(k), personal IRA, and other investments. But in the survey, 4-in-10 people admitted they save less than 6 percent per year. That’s a major shortfall.

These days you can probably expect to enjoy 25 to 30 years in retirement. It’s not easy planning for such a long investment time horizon, especially when most busy folks barely have time to plan what’s for dinner.

That’s why it’s crucial that you make a commitment right away to:

1. Save more NOW so you have enough gold to enjoy during your golden years, and …

2. Carefully manage your 401(k) or IRA so you get the most bang for your retirement buck.

If you’re a younger investor, then you have time on your side, and the most important thing you can do right now is boost your savings rate. Even a relatively small, seemingly insignificant increase in savings can add up over time thanks to the magic of compounding.

Consider this: Skip just one Starbucks visit per week (but never on Monday) and invest that extra five bucks instead. You might be pleasantly surprised to find that, by earning just 8 percent a year on your extra savings … you end up with $12,850 twenty years later!

I don’t know about you, but for an extra twelve thousand dollars in the bank I can go without a Starbucks buzz once a week!

But it’s not only about how much money you invest for retirement; how you manage your 401(k) or IRA over the years is just as important in building and preserving long term wealth.

Many younger and even middle-age investors make the common mistake of being too conservative with their investment options. Cash (and cash-like) investments like bond funds, CDs, fixed annuities, etc. can seem like a safe option when markets turn volatile, but remember you are investing for a 25 to 30 year retirement; so you can afford to be a bit more aggressive with your investment mix.

Don’t get me wrong, I’m not suggesting you quit your day job and learn how to day-trade commodity futures, but a 401(k) or IRA allows you to compound your investments tax-free for many years. So it makes sense to match your investment mix to the long-term nature of these plans by favoring stocks over bonds and mutual funds that offer long term capital growth, or even aggressive growth, over income funds.

Here are three other important tips to keep in mind when it comes to managing your retirement investments:

#1 Meet your match: Speaking of matching, if you’re lucky enough to work for a company that offers to match some of the money you invest in your 401(k), be sure you meet the minimum contribution to receive all the matching funds you’re entitled to from your employer.

For example, let’s say your employer is willing to match HALF of the first 6 percent of your salary you contribute to your 401(k). Think about it this way; NOT contributing at least 6 percent of your paycheck is like turning down a 3 percent raise from your boss! It’s free money; don’t leave it on the table.

#2 Play catch-up: For older investors, age 50 or above, you can make 401(k) and IRA catch-up contributions to make up for saving less in earlier years. Take full advantage of this now if you’re able. In 2014 you can kick in an extra $5,500 to your company-sponsored 401(k) plan; and an additional $1,000 to your IRA account. If you can spare the money (remember the Starbucks parable) then take advantage to sock away more money now.

#3 Keep your balance: Assuming you make all the right moves to take full advantage of the tax-deferred benefits offered by a 401(k) or IRA, you still need to carefully manage your growing nest egg. You can’t control the ups and downs of financial markets, but you can manage your investment choices.

First, build a well balanced, diversified portfolio by selecting a mix of different assets: stocks, bonds, commodities, cash, etc. that’s in line with your investment goals, time horizon and above all, your tolerance for short term market volatility.

The various asset classes behave differently depending on where we are in the business cycle. So even if part of your portfolio is declining, it is balanced by other assets that should be performing better, delivering a smoother ride for your overall portfolio.

Second, make sure you revisit and rebalance your investment mix on a regular basis, perhaps quarterly, but at least once a year. Be sure your 401(k) or IRA doesn’t get out of balance and top-heavy in any single asset class or individual security.

Again, there is no need to get over-active with portfolio changes. Just be sure to reset your investment mix from time to time so it remains balanced and aligned with your investment objectives.

Good investing,

Mike Burnick