At Grow, we know that small changes can have a profound effect on your finances over time. In our Growth Spurt series, we highlight quick money moves with serious long-term payoff.
If you’ve already enrolled in your company’s 401(k) plan, well done. You’ve already taken a crucial step toward financial security. (And you’re contributing at least enough to get any match your employer offers, right?)
But if you haven’t selected your investments or haven’t reviewed your picks recently, you may be missing out on some serious money. While it’s tempting to stick with the default funds—hey, your company has your best interests at heart, right?—doing that could cost you over the long run.
“The biggest danger is that you won’t be able to retire when you’d like because your investments were never aligned with your goals,” says Darrow Kirkpatrick, author of “Retiring Sooner.”
Set aside 15 minutes though, and you can sort that out right now. Really.
First, Some background
The investment options available to you depend on the parameters your employer set up. According to FINRA, some plans exclusively offer mutual funds—a professionally managed collection of stocks or bonds funded by shareholders—while others allow you to select a combo of company stock, individual stocks and bonds, and variable annuities (which pay you an income in retirement determined by the performance of the investments you choose). You can find out what’s available to you, and change your selections, by logging into your account.
Okay, Now What?
Set your phone timer for 15 minutes. As you start constructing or shifting your portfolio, keep in mind two key principles. The first is risk tolerance. Generally, the younger you are—and therefore the longer you have until retirement—the higher threshold for uncertainty or market fluctuations you can afford to have.
This plays out when calculating your stocks—typically thought to be the riskier asset—and bonds split. “Younger and less-risk averse investors can have fewer bonds, and older or more risk-averse investors should hold more,” explains Certified Financial Planner Christina Povenmire. To come up with your stock percentage, one rule of thumb suggests subtracting your age from 100. So if you’re 30, your portfolio would consist of 70 percent stock funds.
Second, pay close attention to fees. “Much of the long-term growth of your retirement savings is attributable to your rate of return, and fees attack that rate directly,” Kirkpatrick explains.
How to spot them? Look for the “expense ratios” for the funds you choose. That’s the annual fee that funds charge shareholders, and they’re required to disclose it. A difference of just one percent each year can translate to thousands of dollars lost to fees over time. “And it’s depressingly easy to pay one percent or more on your investments,” says Kirkpatrick.
When it comes to index funds, which mirror popular indexes like the S&P 500 and are Kirkpatrick’s 401(k) investments of choice, aim for annual fees close to .1 percent. Mutual funds tend to charge higher fees: a 2015 Morningstar report found that, as of December 2013, the average fund charged 1.25 percent. But with a little digging, you can often find some that charge .5 percent or less.
The Department of Labor provides detailed information on understanding your plan’s fees and expenses, and you can also lean on resources like SigFig and FeeX to analyze your portfolio, uncover hidden fees, and, in some cases, suggest ways to lower them.
Choosing your investments doesn’t need to take long, especially if you’re looking to split your investments across a few low-cost, broad-market index stock and bond funds.
By putting in a little effort now, you can not only boost your returns but you’ll get in the habit of revisiting your portfolio regularly to make sure it still fits your needs, and adjusting as you go along, which can mean an even better payoff over the long run.
January 4, 2016