Stop Ignoring Your Biggest Financial Asset: Your 401(k)  

4 minute read

Welcome to the world of retirement savings. Let’s dive into your 401(k) and discover how you can make the most of this powerful tool. 

Did you know that for most people, a 401(k) is their main, if not only, source of retirement income apart from social security? Unfortunately, many people don’t give their 401(k) the attention it deserves. The good news is that small adjustments you make now can have a big impact later on, thanks to the power of compounding interest and minimizing fees. So, let’s explore some simple strategies to maximize your 401(k) and what it can do for you.

The Pre-Retirement Gap in Financial Planning

You may be wondering why most financial planners don’t seem to care much about your 401(k). The truth is, many financial planners make money by charging a percentage of the money you invest with them. But here’s the catch: you can’t invest the money in your 401(k) with them. As a result, they don’t profit until the money comes out of your 401(k) later in life. This creates a gap where younger people like yourself aren’t getting the guidance they need for their financial future.

With flat-fee advisors, it’s a completely different story. Flat-fee advisors work for you and only you. Since they’re not motivated by a percentage fee, they look at your full financial picture rather than picking and choosing the parts where other advisors would stand to gain. Flat-fee advisors can provide valuable guidance on optimizing your 401(k) and help you manage your overall financial life.

Optimizing Your 401(k) for Maximum Growth

Now, let’s focus on maximizing the potential of your 401(k). Your allocation within the account matters greatly. You may be paying higher fees than necessary, lacking proper diversification, or taking on more or less risk than you should. Here are a few key areas to consider:

Saving Amount: Think about how much you’re saving in your 401(k). The more you save, the more money you’ll have when it’s time to retire. Even if it’s a small amount, consistent contributions can add up significantly over time. A good advisor will also take your present-day life into account, helping you plan for the things that are important to you now while also saving enough for your future.

Roth vs. Traditional IRA: You may have the option to choose between a Roth or traditional IRA. A Roth IRA allows you to contribute money that you’ve already paid taxes on, while a traditional IRA lets you contribute pre-tax money. The general rule of thumb is that a Roth can be more beneficial for younger investors, but the best choice depends on your current tax situation and expectations for future taxes.

Allocation: Imagine your 401(k) as a delicious pizza that you’re dividing into different slices. This is what allocation means for your retirement savings. It’s important to spread your money across different types of investments — such as stocks, bonds, big and small companies and even international investments — to reduce the risk of having all your eggs in one basket. Depending on your age and goals, you might allocate more to stocks for potential growth or more to bonds for stability.

Fees: Just like some products are more expensive than others, the same goes for investments within your 401(k). Some funds charge higher fees, which can eat into your potential earnings. Be sure to check the expense ratios of the funds you’re investing in. Lower fees mean more money stays in your account, working for you!

The Pitfalls of Target Date Funds

You may have come across target date funds, which are set-it-and-forget-it options. These funds are designed to match your retirement date and adjust their investments accordingly. However, relying on a target date fund has some drawbacks. Different companies may have varying investment philosophies and stock exposure, which may not align with your goals. Moreover, target date funds don’t know you — they lack knowledge about your personal finances, risk tolerance, and other important factors. They can also be more expensive compared to building a diversified portfolio with other funds available in your 401(k).

Capitalizing on Company Matches

When your employer offers a company match, it’s like getting free money for your savings. Don’t miss out on this opportunity. Sometimes, married couples overlook the company match if one spouse earns significantly more than the other. The lower-earning spouse may feel like they don’t have the resources to contribute to household expenses as well as savings. However, it makes financial sense for both spouses to contribute and take full advantage of their respective employer matches. By working together and adjusting your strategy, you can save more without increasing your overall savings input.

Managing Your IRA When Changing Jobs

If you ever change jobs, don’t rush to rollover your 401(k) to an investment company. Some 401(k) plans offer excellent investment options at a fraction of the cost charged by external “advisors.” By working with a flat-fee advisor, you can receive independent and objective advice. They can help analyze whether it’s in your best interest to keep your funds in the account or rollover.

Thanks for coming along on this journey through smart 401(k) strategies. Remember, the decisions you make today can shape your financial future. Seek guidance from a fee-only advisor who prioritizes your best interests. With their help, you can optimize your 401(k) allocation, avoid costly mistakes, and ensure a secure future. Start taking control of your financial destiny now, and enjoy a worry-free retirement later!

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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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