Last week I wrote about 401(k)-related questions to which the answer is almost always "no." To counter that, this week I have a list of questions to which the answer is almost always "yes." These common questions stump many retirement plan participants trying to decide how to make the most of their investments. Remembering "yes" could help you accumulate more money for retirement.
1. Should I look for help? Yes! Here's why:
You consult a mechanic for your car, a doctor for your body, a stylist or barber for your hair – give your 401(k) the same attention. Treat it as well as you treat your dry cleaning, your teeth and even your washing machine by going to a professional.
An investment advisor can help you decide how much money you'll need to live the retirement you've always envisioned, how much you need to save each month to help stay on track, what mix of investments is most suited to your unique situation and investor personality and when you can tentatively plan to retire.
2. Should I continue to increase the amount I contribute to my 401(k)? Yes (unless you're already maxing out your contribution)! Here's why:
The sum of money you'll need at retirement depends upon a seemingly infinite array of variables: What do you want to do during retirement? Where will you live? How will your health hold up? But two things are certain. You'll need a relatively large lump sum if your money is to last through 20 or 30 years of retirement, and you bear the primary responsibility for accumulating that lump sum.
The reality is most average working Americans will eventually need to max out their annual 401(k) contribution limit in order to reach their retirement goals. So start small if you have to. Start larger if you can. Either way, keep increasing your regular monthly contribution every year, adjusting your budget along the way to accommodate.
3. Is rebalancing my retirement investments really a big deal? Yes! Here's why:
An unbalanced investment portfolio could be too risky. Over time, some investments will outperform others. As a consequence, the faster-growing investments will make up a larger percentage of your portfolio than you initially intended.
It's tempting to allow a high-performing investment to keep riding, but higher-performing investments are often more volatile – which typically means they're riskier. If you allow a large percentage of your retirement assets to be held in a single fund or type of investment, the results could be dire if that fund or investment type hits a rough patch. You have to rebalance so that all the percentages are back where they started.
4. Do I need to understand the different mutual funds in my plan? Yes! Here's why:
It's hard to make good decisions about which funds to choose if you don't understand the options that are available. You should make sure that you have a good working knowledge of the basic asset classes, along with the risks that are associated with them. Then familiarize yourself with your plan's mutual funds, categorizing them by asset class. Only then will you be positioned to build a well-diversified portfolio that is suitable for you and your long-term financial goals.
5. Does it really matter if I wait until next year? Yes! Here's why:
Waiting a year or two to start contributing to your 401(k) plan, or to increase your contributions, means you're losing out at an opportunity for your nest egg to grow. Even a seemingly small amount contributed now could grow to be much greater over the course of your career, thanks to the power of compounding. Consider that if you make $40,000 a year, contributing an additional 1 percent – that's putting just an extra $7.69 into your 401(k) every week – could mean an extra $45,300 to your nest egg 30 years from now (assuming an 8 percent annual return compounded annually). Wait a year to start and that additional 1 percent may only be worth about $41,586; wait five years and you could be looking at just $29,242.
So don't procrastinate. If you're not contributing to your 401(k) account, start now. If you are contributing, then consider contributing more. Set up annual contribution increases, even small ones. Every little bit can make a difference in the long run.
Scott Holsopple is the president of Smart401k, offering easy-to-use, cost-effective 401(k) advice and solutions for the everyday investor. His advice has been featured on various news outlets, including FOX Business, USA Today and The Wall Street Journal.