Here are my tips for dealing with your 401(k) plan:
1. Before you invest in a 401(k) plan (or anything else), be sure you have 6-12 months living expenses in an insured savings account or in short-term FDIC-insured Certificates of Deposit.
2. The annual contribution limit in 2017 for 401(k) plans (and for 403[b] plans, most 457 plans and the government’s Thrift Savings Plan) is $18,000. At the very least, invest the minimum required to receive the maximum matching contribution from your employer.
3. If your employer offers a Roth 401(k), consider taking advantage of it. These contributions won’t reduce your current tax bill, but all of the money in your Roth account (both contributions and gains) can be withdrawn tax-free after you reach age 59 1/2.
4. Restrict your 401(k) contributions to low management fee index funds. A Target Date Fund might be an option, if the underlying funds are all index funds (like those from Vanguard). Otherwise, you can follow the simple “three index fund strategy” I discuss in this blog post.
5. Ignore the financial news. Check your 401(k) statement once or twice a year. Remember, this is money you can’t access without a penalty for 10, 20 or even 30 years (or more). What’s happening in the short term is irrelevant. Why pay any attention to it?
This week’s video: Mad Money Should Make You Mad
Jim Kramer’s “Mad Money” advocates specific stock picks. But Kramer’s picks consistently underperform the S&P 500 Index.
Subscribe to Dan’s new YouTube channel and keep your investing dollars right where they belong – with you! Learn all the secrets Wall Street doesn’t want you to know.
Question from Fred:
My employer doesn’t match. Should I contribute to my 401(k) plan?
Even if your employer doesn’t match, a 401(k) plan can be a good savings vehicle, but only if the investment options give you the opportunity to invest in a globally diversified portfolio of low management fee index funds. Costs matter. You should be able to build a portfolio within a 401(k) plan with mutual funds that have rock bottom fees, like those discussed in this blog post.
Unfortunately, this is rarely the case. If your plan is loaded with expensive, actively managed mutual funds, consider opening an account with a low cost provider like Vanguard, and establishing a traditional or Roth IRA and an after-tax account.
Recommended resource of the week
This week’s pick is: https://portfoliosolutions.com/latest-learnings/blog
Why I like it
Rick Ferri is a financial analyst, author, speaker, former adviser, and founder of Portfolio Solutions, LLC. The blog provided by the team at Portfolio Solutions covers a wide array of financial subjects, in a sound and responsible way.