By Ed McClure, CFP®, PPC®
If you have a 401(k) account set up through your employer—or if you plan to set one up soon—there are a few important things you should know about retirement accounts and investments.
Because investment accounts are subject to the fluctuations of the market, they carry an inherent risk. A 401(k) can lose value during an economic downturn or if certain industries or sectors have a bad year. I’ve been doing financial planning for 25 years, and I’ve observed some principles that you need to follow in order to be successful with your 401(k) plans. Here are my thoughts:
1. Start As Early As Possible (Read: Now)
You can’t time the market or predict which asset classes are going to perform well in any given year, but history has clearly shown that people who start early and stay invested over the long haul will do well—even if they invest at the worst possible time.
There is no perfect time to get started, but you will do yourself more harm by waiting. Also, keep in mind that most companies have limited time frames to join their 401(k) plans, so, if you delay, you could miss six months to a year of savings. If your employer offers a company match, you’re also missing out on additional income.
2. Keep Putting Money Away (No Matter What the Market Does)
We’ve all heard the adage “buy low, sell high.” However, the market doesn’t go straight up. What the market did in the last six months is not an accurate predictor of what it will do in the next six months.
Case in point: From 1999 to 2002, the market dropped by just over 40%. If you stopped contributing to your retirement during the dip, you missed out on tremendous gains that came from the recovery afterward. The best year of a decade often comes right on the heels of the worst year. When the market dips, it’s the best time to buy!
3. Raise Your Contributions As Your Income Increases
Sometimes it even makes sense to continue increasing your 401(k) contributions even after you have maxed out your company match.
For 2021, the IRS allows you to defer up to $19,500 of your income to contribute to your 401(k). Starting in 2022, you will be able to defer up to $20,500. You can also make another $6,500 in catchup contributions if you are 50 or over. The highest-earning years for most people typically fall between ages 50 and 65. It is important to take full advantage of the opportunities available to you during these years.
4. Resist “Hot” Investing Trends
You might get a report from your employer showing how each of the funds performed in your plan. I’ve had clients look at performance reports and see that one fund or another did well last year. Then, they’ll ask me if they should put all of their money into that fund the following year.
There is no crystal ball and nobody can predict what a given fund or market is going to do. I usually advise my clients not to move their money around after they fund their 401(k). People who commit to one investing strategy and stay the course almost always do better than investors who try to catch the next wave.
5. Don’t Pull Out When the Market Tanks
In 2008, I had numerous clients call me to say they wanted to get out. Thankfully, in most of those cases, I was able to convince them to stay put. That’s because those who panic and cash out when the market is down may end up in a far worse position than if they were to hold on a bit.
Markets may rebound from downturns. In fact, you may be getting a discounted price on the assets you buy when the market is in a dip! An individual company’s stock price can drop to zero, but the market is not designed to become worthless.
If I’m your advisor, there may be times that you want to yell at me for telling you this, but if you stay the course, we hope you will be glad you did.
I enjoy helping people plan for their retirements and take care of their families. If you’d like to discuss how I can help you get a better understanding of your 401(k) plan and how it fits in with the big picture, give me a call at (760) 607-0611 or email [email protected] to set up a consultation.
About Ed
Ed McClure is a CERTIFIED FINANCIAL PLANNER™ (CFP™), Professional Plan Consultant® (PPC®), and founder of McClure Wealth Management. With over 25 years of experience, Ed works with business owners who want to maximize their retirement plan benefits, businesses that need help setting up and managing a 401(k) for their employees, and families who want guidance while planning their futures. He is known for simplifying complicated and intimidating topics and making wealth management concepts easy for others to remember and understand.
Ed has established himself as a trusted resource for business owners and individuals, and his mission is to help his clients achieve the financial independence and well-being they deserve so they can give their time and energy to the people and things they love. He has a bachelor’s degree in finance from the University of Illinois. In his spare time, Ed conducts financial workshops for the Just In Time for Foster Youth organization, which helps equip young men and women as they come out of the foster care system. He also loves to travel and spend time with his favorite people. To learn more about Ed, connect with him on LinkedIn.