Life Notes Financial Health article by Brent J. Welch, CFP®, ChFC, CRPS®, CLU, AIF®
For the past 31 years, I’ve worked with individuals to help them retire with confidence and peace. Today, I want to give you what I think are the three best tips for giving your 401(k), 403(b) or 457 retirement plan a tune up.
Tip #1: MAX OUT YOUR ROTH 401(k) CONTRIBUTIONS
When you are in the wealth building phase, up until five years before retirement, it could be beneficial to maximize your contributions. Are you doing all you can to max out your 401(k) plan contributions? For 2015, the max contribution to your 401(k) plan is $18,000. If you are over 50 years old, you can contribute another $6,000 making your max contribution $24,000. You may choose to put all of your retirement dollars into the ROTH 401(k) option. This may be a wise choice, since the highest average marginal tax bracket is relatively low in 2015 and your earnings are probably higher now than at retirement. If you cannot max your 401(k) plan to the IRS limit, then choose the highest percentage contribution you can afford. The proper order of this step comes after you have built up a six month emergency fund and are on track to snowball your debt to zero.
Tip #2: PUT THE PEDAL TO THE METAL
Review your fund choices within your 401(k) plan and look first at a “Style-Box Grid” to balance out your small, medium and large company stock mutual funds. NOTE: please understand that this example is for a 100% stock investor in the aggressive growth category of asset allocation. By having some in each of the style-box categories, you may be able to take advantage of various growth patterns. During early bull markets, (those that go up), small and mid-cap stocks tend to do better. In the mature stages of a bull market, the larger companies seem to sustain better growth momentum. This morning, I allocated my own plan to have 25% in large company growth stocks, 25% in large company value stocks, 25% in mid-sized company value stocks and 25% of my money into small company stocks.
When narrowing down your options to one fund in each category, you may want to do what I did. First, look at the best 10 and 5 year performers. Then funnel that into the optimal three year choices. Finally, consider the most recent year’s performance to determine what your favorite funds are. Of course, past performance is no guarantee of future results and all investments contain risk, including the loss of principle.
This process of keeping your allocation simple and concentrated in the best-performing funds may help you be the most comfortable with your 2015 allocation. At least once a year, not more than once a quarter, you may want to reallocate your mutual fund choices to reset your sails for the upcoming economic winds. Choosing automatic quarterly rebalancing also can help a bit.
Tip #3: KEEP EXPENSES AS LOW AS POSSIBLE
When reviewing your funds, take a look at expense ratios as well. You want to make sure you are getting what you pay for. For example, if you can achieve a similar allocation by choosing your own funds to create your own target-date or asset-allocation fund, why not do it yourself? Why not ask the help of your Welshire Wealth Advisor and save a half percent or so? You might be able to maximize returns and minimize expenses at the same time! Please ask the help of Kristy or Josh, your Welshire Wealth Advisors, to help you allocate your 401(k) plan in the future.