Description: The article below focuses on the extremely important topic on 401k. The author is going to mention five of the most serious mistakes people always make with their 401K. We can learn the details of the analysis of the retirement account including categories, funds, benefits and disadvantages.
Everyone, the lesson here for money evolution calm things can be a blog, I may be talking about what I believe to be five of the biggest mistakes people sometimes make with their 401 K.
So mistake number one is not contributing enough and this kind of falls into two different categories, number one is not contributing enough to at least get the full company match.
I think this is a big deal, in fact, I’ve talked about it here on the blog several times, but make sure you’re contributing at least enough to your 401 K to get that match, but you also want to look at the plan, how much money you think you’re going to need for your retirement.
I see people all the time, they are simply not putting enough money into their 401 K or into other investments to get them where they need to be for their retirement, they’re only putting in the 5% for their company match, because they don’t see any benefit in putting anything more than that. So you can understand how much you’re putting in if it’s going to be enough for you to reach your retirement goals.
Mistake number two is trusting target-date funds, I think there are probably a lot of advantages that target-date funds have, they’re a hands-off approach to investing money for your retirement.
But you want to take some time and understand what’s going on inside these target-date funds, what I think you need to know is what the allocation primarily is, what’s the allocation between stocks and bonds.
If you’re a younger investor, you may find that the typical target date fund that may be part of these 401 k plans has way too much money in bonds and maybe you should be putting more money into stocks and more growth types of investments.
Because you have so much time on your side, we also see as people get closer to retirement, some of these target-date funds don’t shift as much as what we think is necessary over into more conservative parts of the portfolio.
So you may be about to retire and you may find that the target date fund option that you have money in has sometimes 80% of the portfolio or more into riskier stocks and and other types of investments.
They could see a drop if the financial markets work against you, so you may understand how your money is being invested in those target-date funds.
The third thing I want to talk about is investing too conservatively, if you’re a younger investor, I think if you spend more time on your side, my belief is that you should have a higher percentage of your portfolio invested in stocks.
Some people might be a little bit worried about that, they might think that even though they’re younger that maybe they should have a little bit more diversification, one of the things that is very nice about the 401k is that it lends very well to an investment concept known as dollar cost averaging, because you’re contributing money to your 401k plan on a regular basis with every paycheck which is at least probably once a month or more.
For most people, you’re getting what’s known as time diversification, you’re putting money into the market as the markets rolling through its ups and downs and a good example of this is that we take a look at what is probably one of the worst ten year time periods ever for the stock market, that’s the period from January 1st 2000 through December 31st 2009, the $100,000 invested in the S&P 500.
By the end of that 10 year time period, your $100,000 investment would have gone down to ninety thousand three hundred sixty four dollars, so about 10 percent less, in addition to that, you would have seen twice where your portfolio would have been down 30 40, sometimes 50 percent depending on when you’re looking at that particular account.
We look at that same period of time and we look at a dollar cost averaging example, if you were say contributing $1,000 a month to a 401k or some other investment plan and you did that consistently as the market was going through those drops and recoveries, you would have contributed 120 thousand dollars over that ten-year time period.
By the end of the ten years, a hundred thousand dollars would have been up slightly to one hundred twenty-eight thousand nine hundred and sixty six dollars, so you took one of the worst time periods ever.
It wasn’t the greatest gain in the world, but it wasn’t bad either, keep in mind, obviously, dollar-cost averaging doesn’t prevent you from losing money and it’s not a guaranteed strategy. But it is a way for you to smooth out some of the ups and downs of the financial market mistake.
Number four is not moving to a more conservative asset allocation as you approach retirement, so as we talked about it, I think some people that are younger need to have more money invested in stocks, they think too many people as they approach retirement leave too much money in stocks and think about all the people you may know some that we’re either thinking about retiring or planning to retire around that 2008 financial meltdown.
How many of those people had to change their retirement plans or delay their retirement? Because they saw significant drop in their portfolio, so we usually recommend for people to start thinking about shifting that asset allocation about five years out away from retirement and start thinking about putting more money into safer investment options and getting that money out of those stocks and growth of your types of investments.
Then finally the fifth mistake is not properly looking at the differences between the Roth option and the traditional option, so obviously, because the traditional investment option has been around the longest, I think a lot of people like the fact that money comes out of their paycheck before it even gets taxed.
So they’ve stuck with that traditional option, but I think more people could benefit by at least looking at the Roth or maybe having a portion of their investment going into their 401k into the Roth option, because I believe if we look at historical records, we’re in a relatively low period of taxation.
So if taxes do go up in the future that could lend very well to a Roth option, I think a lot of people have made this decision without putting a lot of thought into it, so that’s the case for you, take a look at the Roth and maybe consider that as part of your 401k savings.
So those are five mistakes that you could be making on your 401k, if you’re watching this video any place other than our blog and money evolution com head over there, check it out, we’ve got other articles and videos to help you plan for your retirement, thanks and I’ll see you next time.