One of the best ways to sock away substantial long-term dollars for retirement is to participate in an employer-sponsored 401(k). In fact, maximum contributions to 401(k), 403(b) and 457 accounts rose to $16,500 in 2009, with an additional $6,000 contribution available as a catch-up provision for those over the age of 50. Unfortunately, many participants in retirement plans leave their plans on autopilot and fail to tune up their plans periodically. Here are some things to consider as you tweak your hard-earned retirement savings for optimum performance.
Make consistent pre-tax deposits
Out of sight, out of mind. You won’t miss the money you’re saving if it’s deposited straight to your 401(k) plan or other retirement account. Plus, pre-tax saving gives you more money to invest. Taxes tend to take a large bite out of each dollar you earn, requiring you to save more after-tax dollars to get the same impact as pre-tax saving. Furthermore, pre-tax saving lowers your taxable income, which means that you’ll pay less to the IRS on April 15.
Diversify your holdings
It amazes me how many people still have 100 percent of their retirement dollars in the one fund inside their 401(k). Take the time to restructure your holdings for the future, recognizing that diversification can reduce risk and improve performance. Most 401(k)s have between five and 25 investment options for you to choose from. Follow Ecclesiastes 11:2, which says, “Give portions to seven, yes to eight,” and diversify your money so you don’t have all of your eggs in one basket.
Limit company stock
It is not uncommon for investors to have a significant amount of retirement funds in their own company stock, and it’s easy to do when the management is telling you about all of the great things the company will do in the years to come. However, most financial planners agree that you should diversify out of your company stock if you are able. As a rule of thumb, try not to allow your company stock to exceed 10 percent of your portfolio.
Preserve capital as you near retirement
As you move closer to that illustrious day, be sure to get more conservative with your investments. Depending upon your risk tolerance, I would begin to move toward income types of investment as you near retirement. However, don’t pile everything in the fixed account. Even if you are retiring next week, you still have a decades-long need for money. Your objective will be to outpace inflation with your retirement assets during retirement.
Balance your retirement income sources
Be sure to keep in mind that there are multiple pieces to your retirement puzzle, and your 401(k) is just one of those pieces. Continue to build equity in your home as you move through your earning years, pay down debt aggressively and even look for opportunities to supplement your income during retirement, if necessary.
Roll it over
Take advantage of the opportunity to roll out your 401(k) to a traditional IRA from a previous employer. An IRA will give you an unlimited investment universe, rather than the limited investment universe of a 401(k). In addition, fewer fees and expenses are typically deducted from an IRA than from a 401(k), so they won’t put such a drag on your returns. IRAs also have the ability to be self-directed, which allows you to invest in real estate and other non-stock investments.
Place your trust in the Lord
Remember to keep an eternal perspective on your money. Our security doesn’t come from fat stock portfolios but rather from God, who promises to provide for our needs. Jesus said in Matthew 6:26, “Look at the birds of the air; they do not sow or reap or store away in barns, and yet your heavenly Father feeds them. Are you not much more valuable than they?” Also, don’t forget which investments are the most important. God promises a much better return on money invested in His eternal kingdom than even the best investment manager can earn here on earth. In Matthew 13:8, Jesus describes the seed that fell on good soil as producing a crop “a hundred, 60 or 30 times what was sown.”
Rob West is the Training and Communications Director for Kingdom Advisors, a nonprofit Life that exists to equip and disciple Christian financial advisors to integrate their faith and profession. Please send questions and comments to [email protected].
The information in this article is for information purposes only and does not constitute advice. You should not rely on any information in this article to make (or refrain from making) any decision or take (or refrain from taking) any action.