Preparing to speak with a financial professional about your 401(k)
While it is important to take an active interest in your 401k, it is also important to consult with financial experts. Before you speak with a financial investment professional, such as a representative of the 401(k) institution, an independent financial planner, or a wealth management consultant, make sure you can answer these questions:
What is a 401(k) anyway?
A 401(k) retirement plan is an employer-provided benefit that allows employees to save a percentage of their current income and defer the taxes on the investment and the earnings. That means you do not pay taxes on a portion of your current salary until you withdraw the funds. A 401(k) is a complex financial savings instrument, subject to changing government regulations. It is a smart idea to learn more about them. The best place to start is through your employer and through trusted sites, like the Internal Revenue Service's (IRS) page on 401k retirement plans.
What are your investment goals?
The designated goal of a 401(k) is to provide for financial security in retirement. If you are closer to retirement, a more conservative strategy will buffer you from market ups and downs. In contrast, for those who are several years from retirement, a more aggressive strategy will provide an opportunity for growth as well as time for recovery from the downturns.
What are your current financial needs?
A benefit of an employer-provided 401(k) is the funding match up to a specific percentage. If you are able to set aside the full percentage from your salary, do so. If your current financial obligations make that too difficult, contribute as much as you can now, and plan to increase the amount as circumstances change (e.g., salary increase). Seek advice to develop a plan to balance your current needs and your longer-term goals.
What happens when the stock market has sudden changes?
Take a deep breath
Sudden drops in the stock market are particularly unsettling if your retirement plan is a 401(k) benefit. “Don’t panic” is the first piece of advice - and one that both financial experts and seasoned investors agree on. So hit the “pause button” before you pull all your retirement savings out of the market.
Volatility in the market is normal, as are average higher returns in the long run, compared to guaranteed saving instruments (e.g., CDs). But no one can predict the timing, severity or duration of changes or returns. Sudden drops can serve as a reminder to review your 401(k) account so that it reflects your tolerance for risk and that it is aligned with your financial goals.
If you have an employer-provided 401(k), now is a good time to:
- Review the performance of the holdings in your account; and
- Speak with a representative of the institution managing the portfolio.
Internal Revenue Service (2020). 401(k) plans. https://www.irs.gov/retirement-plans/401k-plans
Vernon, S., Harrati, A, & Streeter (2019). Are Americans saving enough for an adequate retirement? Stanford Center on Longevity. http://longevity.stanford.edu/sightlines-financial-security-special-report-mobile/#retirement
Reviewed in 2020