By no means is this an exhaustive list but it provides a good framework for understanding the basics of your employer-sponsored retirement plan, otherwise known as the 401(k).
A 401(k) plan can be a great tool to help supplement your retirement nest egg when used appropriately, or it can hurt you when it is misused.
Understand the Management Fees
I have come across numerous misconceptions from working with professionals regarding their 401(k) plan. Some of this comes from not reading the details of the 401(k) plan or not consulting with a live person to identify the most suitable 401(k) plan strategy for themselves.
This is oftentimes overlooked and can be tedious, but I encourage you to always read the fine print to understand the management fees so that you can compare it against other investment options.
A complicated fee-structure can eat away at the growth of your investment portfolio.
Consult with a Live Person for a Suitability Checkup
A 401(k) strategy that is a good fit for your coworker does not necessarily mean that the same strategy is a good fit for you. Everyone has different financial situations based on their own circumstances with a unique set of goals. This is why your 401(k) plan should be constructed to fit your unique situation and specific needs instead of a one-size-fits-all approach.
Many employers will categorize you into a particular group and then by default assign you to a 401(k) plan just based on your age. These type of investment vehicles are formally known as [target-date funds].
The problem with this approach is that there are numerous other factors that must be taken into account when constructing your investment strategy other than your targeted retirement age, such as your risk tolerance, desired monthly income expectations during retirement, current/future lifestyle goals, legacy planning, and so on.
Take Advantage of the Company Match
Many employers offer a company match up to a certain percentage, typically within the 3-6% range. In other words, a company match is when your employer will match your contributions dollar for dollar up to the designated percentage amount.
However, many employees do not max out their 401(k) contributions up to the company match for one reason or another.
Think of it this way, you are literally leaving FREE money on the table when you fail to take advantage of the company match. As a result, you will potentially miss out on substantial compounded growth over the life of your 401(k) plan.
Do not Borrow from your 401(k) Plan
The whole point of a 401(k) plan is to leave that money completely untouched until you are ready to make withdrawals to supplement your retirement income. Therefore, you will disrupt the entire function of the 401(k) plan if you borrow from it and this will put your retirement plan at severe risk.
Furthermore, the interest rates and penalty fees are severe when the 401(k) plan loan is not paid back on time to help deter you from borrowing from it in the first place. In other words, avoid borrowing from your 401(k) plan at all costs.
Do not Rely Only on a 401(k) Plan
Pensions plans are nearly extinct.
With that said, the act of relying only on your 401(k) plan to survive during retirement can be risky business. It might be a good idea to incorporate more than one investment vehicle into your retirement plan so that you are not [completely screwed] if one of your investment vehicles blows up!
Diversify your investment strategy, but don't overdo it.
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Disclaimer: Hudson Wealth Management, LLC (HWM) is a FINRA registered investment adviser firm. Investing in securities involves risks, and there is always the potential of losing money when you invest in securities. Before investing, consider your investment objectives and HWM's fee schedule. The information provided herein is for illustrative purposes only and does not constitute personalized investment advice, recommendations or solicitations to hold, buy or sell any investment or security of any kind. All images and return figures shown are for illustrative purposes only and are not actual customer or model returns. Past performance does not guarantee future results.
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