I’m going to go out on a limb here and make an assumption: You haven’t looked at your 401(k) allocation in months.
In fact, if you’re like most Americans, you probably haven’t looked at it once all year.
Don’t feel bad. If it weren’t for the fact that I write about 401(k) allocations professionally, I probably wouldn’t monitor mine as closely as I do. There’s just nothing sexy about an account full of standard mutual funds.
But while your 401(k) plan just doesn’t seem exciting enough to bother watching, you really should take a good 10 minutes today and give it a look.
That’s because the decisions you make with your boring, plain-as-vanilla 401(k) plan are a lot more important to meeting your retirement goals than that sexy options spread or small-cap biotech stock you’ve been eyeing.
As I wrote earlier this year, the humble 401(k) plan is the only investment vehicle I have ever seen that offers returns of up to 46% per year just for showing up… without putting a dollar at risk in the stock market.
So, before you close this article and get on about your day, I want you to log into your 401(k) site and do two things.
First, and most importantly, check your contribution levels. Check to see how much you are putting in per paycheck, and ask yourself – can you afford to chip in more?
You are now able to sock back $18,000 per year – $24,000 if you’re 50 or older.
Imagine all the money you’d be saving in taxes if you contributed that much per year!
If you’re in a high tax bracket, you’re probably paying 40% of your income in taxes. That means if you put $18,000 into your 401(k) plan, which is tax-deferred, you’d effectively save $7,200 a year in taxes alone!
That’s why I recommend maxing out your contribution levels. Hell, I’d go so far as to say you should actually put in more than you can afford.
Given the tax breaks, I’d also consider spending down other savings and stuffing them into the 401(k) plan. By converting your other savings into the 401(k), you’re just saving yourself a bunch in taxes.
Secondly – and this is nearly as important – check your current asset allocation. You don’t necessarily need to make any major allocation changes today. But at least be aware of what you own.
The time is coming when you’re going to want to get defensive and take a little money off the table. The U.S. stock market is broadly overvalued. It’s looking more and more at risk. The last thing you want when the market takes a turn is to have a retirement plan primarily allocated to stocks!
So make sure you scope out a few bond or money market funds. That way, when the time comes, you can switch to cash and avoid suffering a major dent in your portfolio.
Editor, Dent 401k Advisor
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