Most employers nowadays are eco-friendly.
Instead of mailing you a quarterly 401(k) statement, like they did in the old days, they email the statement to you or make it available to you digitally through a workplace portal.
We’re all for saving trees.
But, any statement, whether emailed or paper, doesn’t do you any good if you don’t look at it.
True confessions: Call me old-fashioned, but I prefer paper statements. When I receive statements at home, I admit that I don’t look at them right away. But eventually I get around to opening the envelope, reviewing what happened during the month, and filing the statement away.
The point is, I actually do look at the monthly paper statement. It’s a lot harder to give your statements the attention they deserve when they’re buried under other messages in an email inbox.
But how many of us look at anything other than the updated market value to see if the account went up or down?
We’re not suggesting you need to go into full Sherlock Holmes mode. But you should be able to answer three basic questions about your workplace plan.
If you can’t, start making it a priority, or hire an advisor to do so for you. It’s that important.
(Our clients, of course, are encouraged to share their workplace 401(k) statements with us so we can give their accounts a proper review).
Question #1: Are you participating in the plan?
You should be. It provides you with a valuable current tax deduction and starts you building a serious retirement nest egg.
Here’s why. Today, the responsibility of funding your retirement is squarely on your shoulders.
Unless, of course, you think the average monthly Social Security benefit of $1,471 will pay all your bills.
Sign up for the 401(k), even if you contribute only a small amount at first. After all, you’re building habits first, and fortunes later.
Once in a while, we encounter a workplace plan so bad that we counsel clients to skip it entirely, but that’s rare. So unless you have a really good reason to stay out, sign up for that plan.
Question #2: How much are you contributing to the plan, in dollar terms and percent of salary?
Ideally, your contributions plus those of your company (“the match”) should add up to 15% of salary or more. That’s what it may take to get you to the retirement finish line.
Check your partner’s contributions as well. Research found that individuals in a relationship tend to undersave compared to singles, because one partner tends to undercontribute, counting on the other person to do the saving for them.
That means that couples can be worse off in retirement than singles. Perverse but true.
If you can’t save 15% of salary, that’s fine. Just come as close as you can, and bump up your contributions a couple of percentage points each year to catch up. The genius of pre-tax contributions that come right out of your paycheck, is that you barely notice the money’s gone.
Sorry to sound harsh, but skimping on saving, or making small 3% or 5% contributions just won’t cut it. You’ll thank me later.
Question #3: What’s your investment allocation?
Your allocation is investment-speak for the breakdown of your funds between stocks (for growth) and bonds or cash (for income and stability).
The younger you are, the more growth you’ll want to target. The closer you are to retirement, the more cautious you’ll need to be. Your 401(k) plan custodian probably has a calculator right on their website that will help you get the right mix between stocks and bonds, or you can use a target-date fund already calibrated to your age and retirement year. There’s no “right” answer, and everyone’s allocation will be different.
That said, one of the worst mistakes you can make is to stick with an allocation that’s ill-suited to your risk tolerance and time horizon.
If you’re one year away from retirement, you might want to rethink a super-aggressive allocation with 100% in growth stocks. If the market plummets, you may not be able to withdraw the monthly funds you counted on. Likewise, a twenty-something in her first job won’t get the long-term growth she needs if she parks all her contributions in a low-yielding money market.