Here are 5 ways to increase your 401k performance.
1. Wise up.
Other than reducing 401k fees, the first (and most important) way to increase your 401k performance is to know what the performance really is. Many people don’t. They just gauge performance by comparing the bottom line from one period to the next. This is not only misguided…it’s dangerous.
An example will explain why. Let’s say you start the year with $100,000 in your 401k. The value at the end of the year is $98,000. You lost $2,000…right?
During the year, you contributed $5,000 and your employer contributed $2,000. You lost $9,000. You had $100,000 but added $7,000, so your basis was $107,000. If the value dropped to $98,000, the total loss for the year was $9,000.
People who just compare the gain or loss between periods underestimate risk and overestimate rewards. As a result, they often take on a lot more risk than they would otherwise be comfortable with. Please don’t do this, OK? It gives me a headache when people do this. Just stop it.
2. Get your fingers out of the cookie jar.
Unless it’s a very unusual circumstance, you should never borrow against your 401k. If you do, you’re setting yourself up for a bad precedent and a gloomy retirement future. There are better ways to get out of debt than borrowing against your 401k.
Of course there are exceptions, but most people I know accumulate the bulk of their liquid net worth in their retirement accounts. Do you know why?
Because it’s hard to get your hands on it. The government slaps a penalty on you if you take money out of your retirement accounts early, and this is one case where I think the government is right. Think about how much money you need to retire. Do you think you’ll get there if you start borrowing from that pot now?
Once you start drawing from this well, you’re likely to continue doing so.
3. Focus, baby…focus.
Besides paying off debt, there is nothing more important to do with your money than contributing the maximum amount you can to your 401k. I say this because you get a good tax deduction for it, and often your employer matches at least some of the money.
Do you see? Both the government and your employer are trying to get you to help yourself. This is probably the only time that’s going to happen in your lifetime. The Universe is talking to you. Are you listening? After you pay off debt, contribute the maximum allowable to your retirement plan.
4. Enough is enough.
Don’t buy company stock with your 401k. Manage your risk by divesting from your company. Look…if the company starts hitting the skids, two things could happen at the same time: the company stock will tank, and they’ll downsize and lay you off. You’ll need a job and a retirement fund. Double whammy. Not good.
Your risk is that if the company goes south, you lose all the way around. Reduce that risk by keeping your retirement assets out of company stock.
5. Minimize performance anxiety.
I am not a buy-and-hold guy. But that doesn’t mean I never experience investment losses. No long-term investor can escape losses at some time or another. I realize that you are counting on your retirement accounts and you get very upset when values decline. It’s only natural.
But facts are facts. You have to ask yourself, what are the best investments for retirement income? Your retirement assets are your longest-term investments. Even if you are 65 years old today and planning on retiring in the next years, you should still think long-term.
I say this because even when you retire, you can’t allow that money to retire with you. It’s got to keep working for as long as you plan on living. That means if you’re 65 today and going to retire, you should still think of your retirement assets as 30-year investments.
That being the case, you want some growth in the account, and the only way to get growth is to invest in equities – with at least some of your money.
(If anything, I’d be very cautious of using bonds right now – especially in retirement accounts. I say this because rates are very low right now, and when they go up, those long-term bond fund values might tank.)
What other tactics have you used to enhance your 401k performance?