Advised Podcast Ep 008: 401K Essentials | Take control of your biggest asset

Your #401k does not manage itself. Sure, there are some automation buttons you can choose from, and it's easy to let 2, 3 maybe even 10 years slip by without giving it another thought. Your 401k will likely become (if not already) your biggest asset. It's what you will rely on to fund the majority of your retirement years. With something that important, WHY aren't we taking it more serious? Most folks strategy is to ignore it until the time they want to retire, and then find out whether or not they can afford to OR adjust their lifestyle down to make due. It is reactionary, and I'm am pleading with you to be PROACTIVE, and take control now. You might have to spend some time (or money) on optimizing the account, but we regularly do a lot more, for a lot less in our every day lives.

401k's are not overly complicated. In fact, their limiting features make them easy to manage with little effort. The key is to build out the proper allocation, rebalance it at proper drift triggers, not date intervals, and keep the fee drag to a minimum. After that it's routine maintenance and a deeper dive into the "how much" and "what type" you are contributing. All of that should be reviewed on an annual basis, because your life, tax status, goals, time horizon etc change pretty much that often.

Today's episode should give you some things to consider and hopefully realize you have more control, than you think.

Listen above or read the transcript below, and let us know what you think of the episode!


Are you giving your 4 0 1 k enough attention? Did you know that it likely will be at some point your biggest asset, the main contributor to your retirement income? Why aren't you paying attention to it? Today we're going to talk about the fundamentals, some of the things that you can be looking at by yourself right now to start improving your 4 0 1 K. Let's get started. You are listening to advise with Rick Luchini. One of the benefits of the 4 0 1 K is it's for savings. You're making contribution every two weeks when you get paid, whether you like it or not, and here's the key, whether the market's up or not, and that's actually to your benefit and that's called the dollar cost averaging. The key there is to keep contributing not only when the market's down, but especially when the market's down. One of the biggest mistakes that I see people making is backing down their contributions or even stopping them all together.


In times of market volatility, I hear things like, I'm going to start that back up. When things get better, when whatever that news event is is over, when the market starts coming back, when things are better, when inflation is this, when the war is this, when the election is this, whatever the next thing is when you're contributing to your 4 0 1 K, you actually want the market to go down. You definitely don't want to stop contributing when it's going down because every time you put money in, you're buying the same stocks, the same bonds cheaper. You're not going to use that money for five years, 10 years, 15, 20, some of us 30 or 40 years.


So we want to get the best price possible when the market's going down. You're getting a better price. Keep contributing, and if you have the ability to when the market's going down, if you're going to do anything different, you actually should be increasing your contributions. Add an extra 1% or 2% in times when the market's going down, buy a lot more, shares cheaper, it starts coming back up. Go back to your normal baseline. Another fundamental day. One mistake that I see more than I would like to is not taking full advantage of the company match, and for some of you that


Might seem obvious, but let me give you a couple of scenarios where maybe it's getting missed when you contribute to your 4 0 1 k. Not all, but most companies offer a match and they come in different formulas. But let's just say for example, your company will match a hundred percent of your contributions up to 3%. So you put in three, they put in three. Another one that's pretty typical is 50% of your contributions up to 3%. You put in six, they put in three. Sometimes that gets missed because you just don't actually know what the formula is. So let's say your company match is 50% of your contribution to a max of 3%. You're putting in 4% and you think they're giving you three, but they're not. They're only giving you two 50%. Here's another scenario that I just saw recently, husband and wife, husband's the high wage earner. In this scenario, he's maxing out his 4 0 1 k and they're using the wife's income to pay some of the bills. She's not contributing to her 4 0 1 K to maximize her cashflow. Husband's doing the savings, he's saving more than enough for both of us. They said correct. However, she's not taking advantage of the free money that their company is willing to give her.


So in that instance, they could have the same exact cashflow and net net more money saved by simply reducing his 4 0 1 k contribution slightly and increasing hers, which then triggers the company match. Always take advantage of the company match it's free money, put in at least enough to get that match, and you have to know their formula to make sure that you're doing it. An easy trap to fall into in a 4 0 1 k is automation. There's a few different versions of this that seem on the surface like a good idea, but when you unpack them, they could cause you more problems. The first one is automatic rebalance. I don't particularly care for an automatic rebalance. Here's why. You're going to pick a timeframe to rebalance your portfolio. Typically, that comes in quarterly semi-Annually or annually. Let's say you have 60% stocks and 40% bonds. So on that specific date, your portfolio is going to


Rebalance back to that 60 40. You're typically hearing that. That's a good idea because that's going to keep you in that 60 40 range and that's going to manage your risk. There's no rhyme or reason to win. You are rebalancing it other than some date that you picked out of thin air and automatically set the system to do so. So what you're doing when you set an automatic rebalance is losing some of the upside potential or downside hedge, depending on which way things are going because you're not actually letting those things play out. You're not letting that momentum play out before you rebalance it. But an automatic rebalance, especially a high frequency one like quarterly, that shouldn't even be an option. Quarterly rebalance, man, watch the stock market go up for three years in a row and every three months, sell stocks and buy bonds and see how that portfolio does versus one that only rebalance once throughout that three year time period.


It's going to be a big difference. Another automation that's available that I really think is a mistake for most people is a target date fund. Target date funds are, in my opinion, a fee trap, and they're easy to get into because you don't know what you're doing. You acknowledge that and then they give you this out, this freebie. Here you go. All you have to do is tell us when you'd like to retire. Pick that date and we'll take care of the rest, right? So I want to retire in 2040, pick the 2040 target date fund, go back to work. Forget about this whole 4 0 1 K thing and we'll take care of the rest. The problem with that is one, there is significantly higher fee drag in those target date funds than had you built a similar portfolio yourself by picking from the other available funds. That drag makes a big difference over a long period of time. Two, and maybe more importantly, all of those target date funds work under the assumption that every single year you get closer to that target date, you should


Be more conservative. I don't necessarily agree with that along those lines from one company to the next, their philosophy can be dramatically different. I've looked at one that by the time the client is 60, they are 75% stock, 25% bond, and another one from a different company, same target date. That one is almost the exact opposite. When the client is 60, they would be 70% bonds and 30% stock only to continue to trickle down from there. By the time they're 65, they're a hundred percent in bond and cash equivalents. So if you know enough about how you should be and want to be allocated to look at the details of that target date fund and decide which date is actually best for you, then you know enough that you can pick from the available funds to build your own portfolio and manage it yourself. The problem is you're picking the target date fund because you actually don't know what to choose and you're thinking that that automation is just going to take care of it for you.


What you typically get by doing that is paying higher fees and having a more conservative allocation than maybe you should. On the topic of fees, it's another thing that doesn't really get paid attention to too much. Every fund that's available in your 4 0 1 k has its own expense ratio. You should know what the fees are, at least as a pertains to a percentage in your 4 0 1 k fee. Drag matters. There's a lot of examples where you can choose a similar fund that has a lower fee just because it's a different company or an index against an actively managed one where the index is regularly outperforming the managed one and has a lower fee. You just have to do a little bit of homework there. You're already saving the dollar. Now it's time to maximize that dollar. I'm not asking you to save more. I'm asking you to maximize the dollar you're already putting in there. Pay less fees, get higher returns, maybe pay less taxes, and that's the next thing that you're going to run into in your 4 0 1 k. Nowadays, a lot of 4 0 1 kss are offering Roth as a contribution option. Roth versus traditional


Is something that comes up a lot outside of the 4 0 1 K when it's time to save extra money, but doesn't get discussed a lot inside the 4 0 1 k, and a lot of you might not even know that that's an option. Which one's right? Well am not going to go down that road because it truly is different for everybody's individual situation. The rule of thumb is the younger you are, the more likely the Roth is going to benefit you, but that's not always a hundred percent true. The calculation is going to be different based on your tax status, your deductions, and things like that. So I think the point I want to drive home here is that there's a lot going on inside your 4 0 1 k. That can make a huge difference on how much money you have when it's time to actually start spending it, and all of those things should be evaluated and taken seriously now and periodically on an ongoing basis. Between now and the time you retire, there seems to be a lot of focus on giving advice when you want to actually retire. Take all of that money you saved out and give it to another company and start paying them fees on it, but how much bigger would that account be had you been doing the right things for the last 30 years? I don't wait until it's time to retire to start caring about the thing. That's your retirement. Thanks for listening.

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Content Disclosure: Luchini Financial LLC is a registered investment advisor. This content is provided for informational and educational purposes only and is not intended to be personalized investment advice, nor a recommendation to buy or sell any investment. Luchini Financial works closely with each client to gain a full understanding of their unique situation prior to rendering advice. The information contained herein is derived from numerous sources, which are believed to be reliable, but not formally audited by Luchini Financial. Information may include statements which are time-bound and subject to change without notice or opinions, which may not come to pass. Please consult Luchini Financial with any questions.

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