Summer is in full swing, and now is the perfect time to head out on vacation and put real life on hold for a week or two. But as the most effective savers know, your financial responsibilities require care and attention all year round. Spending just a little time with your 401(k) on a regular basis, for starters, could go a long way towards breathing easier later on in life.
Fortunately, there are simple steps you can take to maximize your retirement savings and make 401(k) maintenance a more manageable pursuit. Here are my tips for staying on the right course this season and beyond:
Use a 401(k) Tour Guide
A recent survey showed that people spend more time researching vacations than they do researching 401(k) plan investments.* This isn't too surprising; planning a vacation is fun, and it's something most of us are perfectly comfortable doing. Planning for retirement, on the other hand, puts many people squarely outside their comfort zone.
The important thing to remember is that it's OK if you're not a 401(k) expert. Many 401(k) plans include some kind of independent, professional advice component. A financial professional can help guide your decisions and assist you in choosing investments that are appropriate for your unique situation. The majority of respondents in the aforementioned survey said they would feel extremely or very confident in their ability to make the right investment decisions if they had the help of a financial professional -- and a little confidence boost can be just what you need to make 401(k) maintenance a regular habit.
Leave Loans Behind
At Schwab Retirement Plan Services, we often see instances of participants taking 401(k) loans increase during the summer months. Moreover, data shows that one of the reasons people have taken a loan from their 401(k) is to pay for a vacation.* These people have the wrong idea. Even though a 401(k) loan can seem like a quick cash fix, it carries long-term consequences, and therefore should only be used as a last resort to address a true and critical need.
For one, while a traditional 401(k) is funded with pre-tax dollars, a 401(k) loan is repaid with after-tax dollars. Second, if you leave your job and are unable to repay the loan in full, the outstanding balance is treated like a withdrawal, triggering a tax bill and likely a 10 percent penalty on top of the tax. One of the biggest advantages a 401(k) plan offers is the ability for your investments to potentially compound and grow over time. If you take funds out of it prematurely, you diminish the benefit of compounding. Don't punish your future self by borrowing against your retirement.
Reflect, Recharge and Rebalance
We're just past the halfway mark for 2015, and the middle of the year is not only the perfect time for a getaway -- it's also a great time to review your 401(k) investments. Swings in the markets over the course of the year may leave your 401(k) asset allocation out of whack. For example, market spikes may skew your allocations if stocks either underperform or outperform bonds and other kinds of investments in your portfolio. One of the keys to 401(k) maintenance is periodic rebalancing -- making sure your investments are still in line with your desired mix of assets and risk tolerance and adjusting them if they aren't. Many 40(k) plans have online tools to help you rebalance your account, and you can even set up automatic rebalancing to help keep you on track in many cases.
With this knowledge properly stowed, you're well on your way to making the most of your 401(k) assets. While it may be tempting to put things on pause for the summer, there's no good time to take a holiday from your financial responsibilities. Safe travels, and happy saving.
*2014 401(k) Participant Survey conducted by Koski Research for Schwab Retirement Plan Services, Inc. Koski Research is not affiliated with Schwab Retirement Plan Services, Inc.
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