Today the most important part of your retirement plan will be the company sponsored 401(k) plan or 403(b) if you work for a non-profit. However, most people know very little about their plans and do not even bother learning more.
Here are five steps to kicking your 401(k)’s butt:
Step 1 – Know the Match
The first thing you need to do is understand the match from your employer. Does your company match dollar for dollar, up to 3% of your contributions? Do they match fifty cents on the dollar up to 6% of your contributions? If it is difficult to understand then you should talk to your human resources representative.
My recommendation is you should always take advantage of the full match. Here is an example of what my former employer matched:
The bank matched $1.50 of every dollar I contributed up to six percent of my salary.
My Contribution = Salary ($50,000) X 6% = $3,000
Match = $3,000 X $1.50 = $4,500
Total Yearly Contribution = $7,500 for the year
Step 2 – Understand How the Company Matches
You need to know if your organization matches in company stock, mutual funds, or just places the match in cash. This is important so you know how to invest your own money.
Step 3 – Don’t Fall in Love with your Company Stock
A rule of thumb is you should have no more than 15% of your portfolio in company stock. You have undoubtedly heard of Enron, National City Bank, and WorldCom? All of these organizations had a great run in their stock and the employees got comfortable putting all of their retirement money in company stock. Most employees are too loyal and rode the stock all the way to the bottom, which resulted in millions of dollars lost forever.
If you learn something from me, please don’t think your company is invincible. No More Than 15% In Your Company Stock!
Step 4 – Know The Funds in Your Plan
You should have access to the ten year returns of the funds you can choose in your plan. Take a look at the funds and order them from the best to worst. Then take a look at the categories (Large Cap, Medium Cap, Small Cap, International, and Bonds). I would then place 20% of your money in each category with the best return. Pretty simple, but you will stay completely diversified.
Step 5 – Monitor Once Per Year
The last step is monitoring your funds once per year. If you notice that you have more than 20% of your money in international stocks due to growth, then you should re-balance. Sell some of the international funds and buy the funds that are less than 20%.
This is a pretty easy formula, but you will have success with it over the long term.