Investing Pensions

How To Manage Your 401(K): Everything You Need to Know

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Are you saving for your retirement? Research shows that most Americans under the age of 38-years old, have less than $3,000 in savings. This dismal figure means that many of the upcoming generations are woefully unprepared for their retirement years.

One of the easiest ways to boost your retirement savings is with a 401(k) plan. The government allows tax breaks on this investment vehicle, depending on what type of 401(k) you use, and your contributions to the fund.

The Different Types of 401(k) Plans

The 401(k) comes in two types – the standard 401(k), and the Roth 401(k). With a standard 401(k) facility, you pay tax on your monthly contributions to the fund. However, the growth on your fund is tax-free, and when you withdraw at retirement age, you are not liable for any tax on the investment amount.

A standard 401(k) investment works oppositely. Your monthly contributions are tax-free, but the government taxes you on your withdrawal when you retire.

Both types of 401(k) vehicles are worth considering, but we suggest that young people under the age of 40 use a Roth 401(k), while people over the age of 40 use a standard 401(k). This strategy allows young people to avoid a lump-sum tax deduction at the end of the investment term, benefiting from tax-free growth of the account. People closer to retirement have a lower tax bracket on their retirement date, meaning that the government will charge you less on the amount withdrawn.

What is a 401k?

Read: What is a 401K? Complete Guide to This Retirement Plan

Why you Need a 401(k)

Every American in the workforce dreams of a day when they no longer have to work for a living. Sitting back for the twilight years of your life, and enjoying the time you have left, without financial worry, ensures that you enjoy your senior years.

The alternative is working till your death or relying on government social programs to support you in your senior years – both of which is every Americans worst financial nightmare.

Preparing for your retirement while you still have the chance to put money aside, is a prudent strategy that assures your independence later in life.

How 401(k) Plans Work

A 401(k) is different from putting money away in your savings account every month. While savings are essential to help you handle emergencies, you aren’t earning any interest on the money you have in a savings or checking account.

Back in the 90s and 80s, the Federal funds rate was far higher than today’s paltry 2.5-percent. With the Federal Reserve set to begin its next easing phase, we can expect that number to reach zero again in the coming years. Most banks don’t even offer their customers the 2.5-percent rate. Instead, they will likely provide you no interest on your savings, meaning that your money never grows. If you leave all of your savings in a checking account, then the monthly fees will start to eat into your savings, giving you a negative return on your money.

It’s for this reason that every working American needs to have a 401(k) investment. Your 401(k) is a managed investment, where money managers place your retirement funds into a pooled account, and then use the funds to purchase assets, such as stocks, bonds, indexes, property funds, and mutual funds.

The account manager oversees thousands of individual accounts in the investment pool. As a result, you gain leverage from the pooled funds, allowing you to maximize your returns on your investment – without managing it yourself. This investment strategy is great news for anyone that has no idea how the markets work, and no clue of how to invest their money in assets.

Most 401(k) plans ask you to define your investment strategy when enrolling. This strategy includes low, medium, and high-risk funds, with the difference being those high-risk assets can yield higher returns – but offer more chance of exposure to risk that may cripple your yield if something goes wrong in the market – such as a debt crisis. Low-risk strategies place your money ion stable assets that are less likely to fail but offer a lower yield.

If you are young, then a high-risk strategy may offer you the best value, as you have time to recover from any market shocks. However, if you are over the age of 40, then a low-risk strategy is the better option, as there is less risk that a market shock will wipe out your retirement savings.

What's the Difference Between a 401k & an IRA

Read: What’s the Difference Between a 401k & an IRA?

How to Manage Your 401(k)

One of the best features of a 401(k), is that you get control over how you manage your investment. You can select your risk tolerance, and watch your money work for you, while you focus on your job that provides your income. If you’re wondering how to manage your 401(k), follow these tips.

Diversify the Assets in Your Investment

We’ve all heard the saying, “don’t put all of your eggs in one basket.” When it comes to managing your 401(k), this adage makes plenty of sense. Speak to your fund manager, and ensure that they are spreading your investment across different asset classes. You can ask the manager to avoid risky assets, such as stocks, and focus on low-risk assets, such as property, bonds, and mutual funds instead.

Maximize Your Employers Contribution

Not all companies will provide you with a 100-percent matching contribution, with some only matching 80-percent of your contribution. Speak to your employer, and make sure they commit to contributing as much as possible to your 401(k).

Young People Should Invest Aggressively

As mentioned, young people have their entire working lives ahead of them. Therefore, they can afford to take more risk than those employees who are closer to retirement. Investing in a high-risk portfolio improves your gains, especially in a booming economy.

The S&P 500, which is a group of the 500 best-performing companies on the Dow Jones, recently reached new highs above the 3,000 mark, showing no signs of slowing down as the American economy continues to strengthen. Investing in these types of index funds can yield far higher returns than investing in government bonds or mutual funds.

Roll Over Your Existing Retirement Account into Your 401k

When opening your 401(k), consider rolling over all of your current investments into the account. Money lying in IRAs, pensions, and any other tax-deferred accounts will perform far better in your 401(k), allowing you to achieve your retirement goals sooner.

Leave the transfer to your investment manager; they use a trustee-to-trustee rollover that prevents any unnecessary taxation on the transfer of your funds into the 401(k) while minimizing any fees involved in the transaction.

Increase Your Contributions Every 6 Months

It’s a good move to increase your contributions every six months. Add 1-percent to your contribution, and you’ll be growing it by more than 10-percent every 5-years. A 1-percent increase may not seem like much, but it significantly improves your funds’ performance. You’ll barely feel this reduction in your cash flow, and the results at retirement can be staggering using this strategy. Remember; it is from small beginnings, that great things grow.

Vital Factors for Growing Your 401(k)

The principles of successful investing in your 401(k) involve three factors; the money you put into the fund, the time till maturity, and your asset selection. The most crucial factor being the money you put into the account.

The compounding effect of putting money into your 401(k) is truly astounding when you check on your financial statements. The earlier you start, the better your returns. Try to allocate 15-percent of your salary to the fund every month, and be prudent with how you take on any new debt that may affect your monthly cash flow and your contributions to your 401(k).

Complete Blooom Review

Read: Blooom Review: A Robo-Advisor for Managing Your 401k

Avoid an Active Trading Account if You Have No Experience

It’s possible to manage your 401(k) without the help of a professional investment manager. Traders choose to use a 401(k) account with their broker to manage their investment. However, it’s vital to avoid this strategy if you have no experience trading the markets.

Don’t fall for the trap of trading schools promising to teach you about forex and stock trading. It takes years to master trading equities and bonds, and if you jump into the market with your retirement account, then you could face massive losses that wipe out your savings. Leave it to the professionals – that’s what they are there for, to help your money grow.

Align Your Contributions with Your Age Bracket

The amount you contribute to your fund depends on your age. No blanket contribution strategy suits everyone, and you’ll need to assess your current situation to see what you can afford to add to your 401(k) each month.

Meet with a professional investment advisor to clear up any confusion with how much you should contribute to your fund each month. The advisor will sit down with you and use an investment calculator to figure out how much you need to allocate to your fund to meet your retirement goals.

If you got a late start, then you may have to contribute a significantly higher amount than someone who started decades earlier. An advisor can help clear the cobwebs from your allocation strategy and provide you with clarity.

Assess Your Risk Tolerance

Risk tolerance describes one thing – your attitude toward losing money. If you shudder at the thought of taking a huge financial knock, due to investing in risky assets like equities, then avoid these asset classes. Watching your money slip away from you can cause severe mental stress, and place pressure on your relationships.

Consider adopting a low-risk strategy that shows slow but steady growth over the lifetime of your investment. Remember – slow and steady wins the race.

Develop an Investment Strategy

Do you have an investment strategy? If this statement leaves you scratching your head, then leverage the advice of experts. Investing in asset classes requires sound financial knowledge of the markets, and professional fund managers spend a lifetime managing investments.

If you want to know where your money is going, then meet with your advisor, discuss your portfolio, and let them advise you on the way forward. Your advisor deals with hundreds of investors over their lifetime, and they will understand the investment strategy that right for you after your consultation.

Review Your Fund Statements

While your 401(k) is somewhat a passive investment, it still requires you to keep your thumb on your account. Your statements are the measure of your funds’ performance, and they give you a clear indication if your fund manager’s strategy is meeting your financial goals.

Investing is like sailing a ship or flying a plane. You know your destination, but environmental conditions may side-track you from your goal. Making minor adjustments along the way helps you to keep your investment on track to reach your goals.

Don’t Make Any Early Withdrawals

Avoid making any early withdrawals from your 401(k) where possible. If you run into financial trouble, look at taking out loans or selling items around the home to cover your expenses before you consider cashing out a portion of your 401(k). Early withdrawals come with stiff penalties that may cost you up to 40-percent of your funds.

Boost Your Financial Literacy and Market Knowledge

If you have no idea about money or investments, then it’s a prudent move to boost your financial literacy. Learning how investors make the choices they do with your portfolio is a vital step in understanding how markets move.

If you spend a few hours a week developing your financial literacy by reading articles like this, then it will bring you one step closer to being able to manage your fund yourself, maximizing your returns while increasing your financial responsibility.

Wrapping Up – Key Takeaways

A 401(k) is a prudent financial investment in your retirement. People who have no idea how to invest can take advantage of professional investors knowledge, experience, and skills to help them grow their money. If managed properly, a 401(k) can help you meet your retirement goals, allowing you to afford a lavish retirement in your golden years.

The flexibility of a 401(k) permits any American with the opportunity to grow their money passively, without worrying that the bank is not giving them any interest on their savings. There is a 401(k) to suit Americans at any stage of their career, with an investment strategy to suit their risk tolerance. The sooner you start investing in your future, the more clarity and certainty you have in your financial position at retirement.


Oliver Dale is Editor-in-Chief of MoneyCheck and founder of Kooc Media Ltd, A UK-Based Online Publishing company. A Technology Entrepreneur with over 15 years of professional experience in Investing and UK Business.His writing has been quoted by Nasdaq, Dow Jones, Investopedia, The New Yorker, Forbes, Techcrunch & More.He built Money Check to bring the highest level of education about personal finance to the general public with clear and unbiased

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