Tips on managing your 401(k) plan effectively
The run-up in stock prices this year could tempt even the most hands-off investor to wade into their 401(k) and make some changes.
The Dow Jones industrial average, Nasdaq and Standard & Poor's 500 indexes are each up more than 20 percent over the past 12 months. But experts suggest investors tread cautiously and avoid major changes aimed at timing the market.
Still, making periodic adjustments to your plan's asset allocation is a wise move, and part of remaining engaged with your overall retirement strategy.
Here are ways to efficiently manage your 401(k):
• Get the basics right
Don't leave money on the table. If your company offers to match up to a certain amount of your 401(k) contribution, make sure you're putting in enough to qualify for the maximum.
Once you have that covered, save as much as you can, as early in your working years as you can.
How much? Experts vary on this, but a common benchmark is to set aside 15 percent of your pay, including any matching funds from your employer.
• Don't bank on winning investments
The market rises and falls, and timing may not be on your side — just ask folks who began relying on their retirement savings as the market hit the skids in 2008.
One good way to maximize your savings is to put more money into the plan.
• Periodically assess retirement costs
Making sure your financial needs are met in retirement requires having a sense of what those costs will be. And not just the basics, but any travel or other major purchases. You'll need to update that plan, particularly as you get closer to your post-work life. By some estimates, retirees will need 85 percent of their pre-retirement income coming in from several sources, including Social Security, 401(k) plans and other retirement accounts, a pension or similar employer-sponsored plan and personal assets, such as other investments, savings or real estate.
• Rebalance your asset mix
Experts recommend taking a look at your asset mix — how much you have invested in certain funds of varying risk, or say, the proportion of your 401(k) invested in stocks versus bonds or other investments — and tweak them occasionally.
“Whether the market is up or the market is down, it's always a good time,” says Philip Rousseaux, president of Everest Wealth Management Inc. “It's kind of an automatic way of always selling high and buying low.”
Rousseaux recommends rebalancing at least on a quarterly basis.
Tyson, on the other hand, says every three to five years is just fine, unless the market has undergone a significant downturn.
As a general rule, stocks are going to be more volatile and risky in the short term, but reduced over the long-term. With bonds, it's reversed. They're less volatile in the near term, but there's a chance that they're not going to give enough of a return in the long term, sapping your funds for retirement.
5. RESIST TIMING THE MARKET
Making major changes to your 401(k) to profit off a market trend can be risky, and experts suggest avoiding it altogether.
“Market timing changes people make are often made on emotional reactions to events,” Tyson notes. “It's better to have an overall allocation, and stick to that.”
And if you do take a shot and miss, don't wait on the sidelines for a time to jump back into the market.
“You don't want to compound that mistake by continuing to engage in more market-timing,” Tyson adds.
6. PLAY CATCH-UP
A law passed in 2006 allows workers over 50 to beef up how much they contribute to their 401(k) plans and other individual retirement accounts. It's aimed at helping those workers closer to retirement age put more tax-deferred money aside while they're still working.
This can be especially helpful if you've incurred a big loss over the years during a market slump.