5 Tips to Optimize your 401(k)

Dec 13, 2016 by

5 Tips to Optimize your 401(k)

1.  Participate

This may sound too simple, but make sure you sign up for your 401(k) account if it is offered by your employer.  In order to reach financial freedom, we need to take an active role in determining how to reach our goals.  Participating in a 401(k) is crucial to reaching financial freedom as it allows us to grow money in tax-advantaged accounts for us to take out later in life.  Many companies have even started to auto-enroll employees as they are hired.  This is great because it automatically gets people saving whether they mean to or not.

2.  Meet the employer match

Would you say no to free money? Me neither, so if your company offers a 401(k) match, make sure to meet the requirements!  Typically the arrangement is structured so that the employer matches 50% of what you contribute up to a certain percentage (5 or 6% typically).  This means in order for you to get all the free money, you need to contribute at least 6% of your income to you 401(k).

Additionally, the money your employer puts into your account does not count towards your total annual 401(k) contribution limit.  This means that in 2017, you can contribute $18,000 to your 401(k) plus also whatever percentage your employers matches.

3. Invest as much as possible

None of us are made of money, so we may only be able to contribute a smaller portion of our over all income to a 401(k), but the more we can invest the greater we help our future selves.  Money invested in the stock market doubles in value approximately every 10 years, so take advantage!

 

4. Diversify

Unless your name is Warren Buffett, you probably should not be picking individual stocks.  The best way to successfully grow your money is to diversify.  A diversified portfolio helps to mitigate the risk of a few bad stocks bringing down your entire portfolio.  The best way to do this is by investing in 3 to 5 mutual funds. This way you spread your portfolio out among hundreds of stocks, rather than a handful.

 

5. Keep Costs Low

Cost is the number one predictor in investment return.  Investors that pay higher fees, tend to preform worse than those who pay lower fees. Ideally we should try and keep our over all expense ratio (cost of investing in funds) to be less than 1.00%, but the lower the better.  The easiest way to do this within a 401(k) is to invest in low cost index funds.  Index funds simply track specific market indexes such as the Dow Jones Industrial Average or the S&P 500.  The costs are lower because they can be operated by computers that track the index, instead of fund managers who are trying to pick which stocks are going to “beat the market”.

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