Pre-tax company sponsored retirement plans offer various benefits and can be key to your retire early and/or retire wealthy strategy. Last year, my husband and I saved $85,300 of which $46,600 of that was in our 401k, 403b and 457 plan accounts.
Once I knew the answer to the following 8 questions, I was able to kick my early retirement strategy into high gear. Check out the questions below and use the Free Retirement Account Questionnaire to record your answers:
1. What’s your web account login information?
When it comes to understanding and optimizing your retirement accounts, this one simple but crucial question.
Do you know how to access your account information online?
Most, if not all companies and plan providers give you online access to your retirement accounts. This allows you to make powerful investment decisions with a click of a mouse.
While it’s great to receive paper retirement statements in the mail, you should know how to access your account information online at any time.
2. Who are your account beneficiaries?
A beneficiary is someone who will get the money in your retirement accounts if you pass away. It’s important to make sure the beneficiary information on your retirement account is up to date. If you’ve gotten divorced, married or had children since first enrolling in your retirement plan, chances are you’ll need to update your beneficiary information.
3. What are you currently invested in?
Your plan will give you the option to pick different types of funds and products to invest in.
The most common types of investments options in a 401k are stocks and bonds. How much or how little the options you have to invest in all depend on your employer and plan. Here’s a comparison of my investment options through my 401k vs my husband’s options through his 403b
My 401k investment options:
- Bond Fund
- Large Cap Equity Index Fund
- Mid Cap Equity Index Fund
- Small Cap Equity Index Fund
My husband’s 403b options:
- Bond Fund
- Diversified Equity Fund
- International Equity
Not only should you know what you’re currently invested in, you should know the portfolio percentage allocation of your investments. Are you invested in 50% stocks and 50% bonds or some other combination?
(Click here to get the Retirement Account questionnaire to jot down your current investment account allocation)
4. Does your portfolio automatically rebalance?
Over time, your target current portfolio allocation will change due to fluctuations in the market. For example, if you initially selected the mix of your retirement investments to be 70% stocks and 30% bonds, over time the value of the holdings in your portfolio can change to be 85% stocks and 15% bonds.
Unless you remember to manually rebalance your portfolio, meaning bring it back to the original target of 70% stocks and 30% bonds, your allocations will continue to change with the market.
Most plans give you the option to automatically rebalance your portfolio for you so that you’re not unintentionally exposed to additional risk. This gives you once less thing to remember to do which is always a good thing.
5. Does your portfolio align with your risk profile and investment time horizon?
It’s important that you consciously make investment decisions in your retirement accounts that align with your risk profile and investment time horizon.
Your risk profile depends on if you are risk tolerant or risk averse. Your investment time horizon depends on how long you want to keep the money invested. If you’re younger and won’t need access to your retirement funds for another 30 to 40 years and consider yourself risk tolerant, you may want to invest more of your portfolio in stocks.
Stock investments will offer you higher returns but more risk compared to bonds. The assumption is since you won’t need to access the money in the near future, you should be able to tolerate the additional volatility for a greater return.
Whatever your risk tolerance and situation, you want to have your portfolio allocation percentage align with your investment time horizon and risk profile
6. What are your portfolio and investment associated fees?
Once you’ve figured out what you’re invested in, you need to know the associated fees with each investment. Fees are taken out of your overall portfolio return and can vary based on the types of investments your choose.
While fees may not seem like such a big deal in the near term, over time, they can add up to thousands of dollars.
Typical fees in your retirement accounts are:
- Administrative fees
- Investment fees &
- Other overhead fees
The total of these fees is often referred to in your retirement plan as the expense ratio.
Usually, the bigger your company, the lower the portfolio fees since the company can spread out the cost to run the retirement account across more plan participants. A reasonable total annual fee or expense ratio for an investment is around 1% or less. The smaller the fee, the better.
Also, don’t forget, the annual expense ratio will increase as the amount you have invested grows. For example, if you currently have $10,000 invested in a fund that charges a fee of .80% per year, the annual fee will be $80. As your investment grows due to compounding interest, your annual fees increase too. If your retirement account balance grows to $500,000, that annual fee of .80% now calculates to $4,000 a year.
Knowing the expense ratios and fees are important when deciding what you want to invest in. You can opt to change from an investment with a high fee and low average return to another fund with a more reasonable fee and similar average return, thus saving you money on fees in the long run.
7. Does your company match your contribution?
To help incentivize you to contribute to your company sponsored 401k plan, your employer will often offer you a contribution match.
For example, if your company offers you a 4% match, they’ll match dollar for dollar up to 4% of what you contribute to your account. If you contribute 3%, they’ll also contribute 3% to your plan. If you contribute 4% to your plan, they’ll contribute 4%. If you contribute 6%, they’ll still only contribute up to 4% as that is their maximum contribution match.
While this may sound like a generous selfless act by your employer, don’t be fooled. Your company benefits from this matching too since they get tax deductions for matching your contributions. Plan contribution matching also serves as a means to reduce employee turnover through what is known as vesting (see question #8 below). Regardless of your company’s motivation, investing up to at least your company match is recommended.
8. Are you currently vested and if not, when will you become vested?
Any money you contribute to your 401k is yours. If you decide to leave your current company, you can transfer your contributions to another plan no matter how long you’ve had the funds in the account.
On the other hand, any money that your employer contributes to your plan usually requires you to work for your employer for a certain amount of time before it becomes 100% yours. This is called vesting. Once you’ve become vested, you can take your employer contributions with you if you leave the company and roll it into a new plan.
If you leave the company before you’re fully vested, you will not be able to withdraw all or any of the employer contribution amounts.
If you can answer the above questions as it relates to retirement accounts, you’ll be a few steps closer to your goals of Financial Freedom. Even if you’re not yet comfortable on what changes you should make to your account, knowledge of your current retirement account situation is powerful.
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