Workplace 401(k)s are a great way to invest for retirement if you have access to one. You can contribute automatically from your paychecks and may even be eligible for employer matching funds that are essentially free money.
Unfortunately, many workers don't make the most of these accounts. To ensure you're getting the best value from your 401(k) in 2021, there are three steps to take as early as possible.
1. Increase your contributions
Most Americans are contributing too little to their 401(k)s. This has serious consequences because it's not possible to live on Social Security alone. You're going to need money in a retirement account to have financial security.
The start of the year is an excellent time to increase the amount you're contributing. This is easy if you've received an annual raise. You can just devote some of the extra money to your 401(k) before you end up increasing the amount you spend (which tends to happen as income goes up). If you begin contributions right away, you'll never miss the raise.
Even if you didn't see a salary bump, think seriously about investing more. Find a few cuts in your budget so you can raise your investments by at least 1% to 2% of your income. If you slowly inch up the amount you put into your 401(k) every year, you'll soon find yourself saving the recommended 15% of your pay without making sweeping lifestyle changes all at once.
2. Check your asset allocation
The market volatility last year was an important reminder of the importance of maintaining the right mix of investments based on your risk tolerance.
Sure, the stock market recovered quickly from the massive losses it experienced at the start of the pandemic. But while recoveries are inevitable after crashes, sometimes they take much longer. If you're overinvested in stocks based on your age and retirement timeline, you risk losing more than you can afford and not being able to wait out the recovery.
At the same time, if you aren't investing enough in stocks, you miss out on the chance to earn the generous returns the market has historically provided.
As 2021 gets under way, take the time to review your 401(k) investments to ensure you don't have the wrong investment mix. Your risk tolerance should change over time, and your asset allocation needs to be reviewed every year so it can change along with it.
3. Review your investment fees
Fees eat away at your returns and have a surprisingly big impact on your portfolio balance, especially when you're investing a lot of money over a long time.
Some 401(k)s charge administrative fees and some offer a mix of investment options that come at a higher cost than necessary. If you're limited to investing only in expensive funds or must pay just to maintain your 401(k), plan to mitigate the damage fees do. Often, this means investing only enough to get the full amount of employer matching funds and then making other retirement account contributions in a different tax-advantaged account such as an IRA.
If you follow the first suggestion and increase your contributions, you'll be taking an important step toward growing retirement wealth. And you don't want to undermine that by investing in the wrong assets. Doing all three of these things ASAP will help make the most of your investment dollars in 2021.