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Whether you’ve been investing in your company’s 401(k) for years, or 2016 will be the first year you’ll contribute to your plan, you’re bound to have questions about making the most of this important piece of your retirement savings strategy. We gathered some questions from Dave’s Facebook followers and asked Drew McMillin, an investing professional with 20 years of experience, to answer some of the most-asked questions.
Take a look and see if we’ve got an answer to your question.
Regular or Roth?
One of the decisions you may have to make about your 401(k) is whether you will contribute to it with pre-tax or post-tax dollars. The post-tax option is also known as a Roth 401(k) option. Trista K. asked which is better and how the choice could impact her retirement.
“This will ultimately depend on your tax situation both now and in the future,” Drew said. Pre-tax 401(k) contributions are made from your gross pay, before taxes are taken out. That reduces your taxable income now and you won’t owe taxes on your contributions until you start to withdraw money from your 401(k) in retirement.
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“If you are in your peak earning years and close to retirement, then the pre-tax 401(k) might be your best option,” Drew said. Your income will likely be lower in retirement so you’ll pay taxes at a lower rate.
“If you are just starting out in your career and expect a growing income over the years, the Roth or post-tax option could be best,” he added. With the Roth option, you pay taxes on the money you contribute now, but you won’t owe any taxes when you withdraw money from your 401(k) in retirement.
Where Is My Money Going?
A lot of people shared Stephanie S.’s confusion about how their money is being used in their 401(k) plans. “I have a 401(k) with a match through my job, but honestly, I’m not 100% sure where my money is going or if it’s a good investment. Where do I start to figure this out?”
The first step is setting up access to your plan, Drew said. “Call your Human Resources department and ask them to send you the information regarding your plan,” he advised. “They should provide information about how to create a login so you can view your plan online.
“To find out if your 401(k) offers good investment options and which ones are best for you, it would be worthwhile to work with an investing professional," Drew said.
It’s an investing pro’s job to be an expert on mutual funds so you don’t have to figure everything out on your own. Your pro can also help you set your retirement goals so you know what you’re aiming for when you start investing. And they can tell you how much you need to invest each month to make sure you hit that target.
A solid investing strategy like that is a huge confidence booster for experienced investors as well as 401(k) newbies.
No Good Options
Some 401(k) investors like Alan W. have already reviewed the options in their plans, and they don’t like what they found. “What do you do when only seven of the 24 options are mutual funds, and they aren’t even good choices?”
Drew recommended people in Alan’s shoes lead the charge for better mutual fund options. “Provide some feedback to your Human Resources department to see if any changes can be made,” Drew suggested. “They should review the plan options on a regular basis with the plan’s investment professional.”
In the meantime, meet with an investing pro to analyze the available funds and select the best mix possible. The employer match on your contributions is too valuable to give up even if your investment options are weak.
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Take things a step further and beef up your strategy with your own Roth IRA. With a Roth IRA you can invest in any of the thousands of mutual funds on the market. Your pro can help you select the best funds for your Roth and show you how to keep your 401(k) and your Roth plans working together long-term so you can look forward to a secure retirement.
When Do I Dump One Fund For Another?
Carlen E. asked the classic investing question, “How do I know when to switch from one investment to another? Do I stick it out even though a particular investment has gone down in value, or do I cut my losses and move my money into another investment?”
Diversification—along with a dose of patience—can help smooth out the market’s ups and downs that worry investors like Carlen, Drew said. “If you are well diversified using Dave’s four-fund approach [an equal mix of growth, growth and income, aggressive growth and international mutual funds] there will be periods of time where international growth mutual funds, for example, underperform your aggressive growth mutual funds,” he said. “However, this trend historically reverses and the opposite becomes true."
“It is important to hold this diversified mix over the long term so you don’t end up chasing returns [buying high and selling low],” he added. “Rebalance your funds at least yearly. For instance, if at the end of the year your four-fund balance is no longer 25% in each fund, you can make changes within the account to bring it back into balance.”
Many 401(k) plans allow you to rebalance your investments automatically at the end of each year. Doing so forces you to sell high and buy low—the ideal strategy for making investment changes.
That One Question We All Need the Answer To
Daniel M. asked the question that’s on all our minds at some point in the retirement planning process: “Will I outlive my savings?”
One way to have confidence in the amount you’re able to save up for retirement is to talk with an investing professional who can look at every aspect of your current plan and put together a detailed picture of what your retirement will look like.
“An investing professional can help you with retirement projections to determine where you stand and what changes you need to make, if any, to ensure you do not live out your assets,” Drew recommended.