Participating in a 401(k) plan is important for every retirement strategy. Whether you’re a new investor or not, it’s important to ask questions and understand your plan options so you can make adjustments throughout your retirement savings journey.
Read on for a list of five common 401(k) questions with answers to help you navigate your retirement.
#1: Can I change my contribution or investments?
Employer-sponsored 401(k) plans often have default for contributions, such as 3%, when you are enrolled. You can, and should, increase your contributions if your budget allows to ensure that you can cover your day-to-day expenses in retirement such as medical expenses, a car payment, mortgage or rent, groceries, or travel.
However, life happens, and sometimes that includes unexpected expenses. If you experience an emergency, job loss, or unexpected home repairs, you can always modify your retirement contribution to provide an extra cushion in your cashflow. When you’re ready, you can always increase the amount again.
You can also diversify your investment mix at any point in time. Having a diversified portfolio can help mitigate risk with market fluctuations. Remember, your 401(k) investment is for the long haul. Just make sure your asset allocation and risk profile are in line with your retirement timeline and goals.
#2: What are the advantages and disadvantages of target date funds?
When a participant selects a target date fund, a portfolio manager will use the predetermined timeline to form an investment strategy for your funds based on when you plan to retire. And while that may sound ideal to many investors, there are advantages and disadvantages to consider.
Advantages of a target date fund:
- Professionally managed portfolios that help you optimize investments for your target retirement date
- Low maintenance
- One-and-done approach – because of their nature, many financial advisors recommend utilizing a target date fund if you don’t plan to have additional investments on the side in order to avoid skewing your overall portfolio allocation
Disadvantages of a target date fund:
- Unable to customize investments
- Higher expense ratios
- Lack of flexibility
Read our blog post learn more about target date funds.
#3: Does my 401(k) plan have a contribution limit?
Every retirement plan has a contribution limit that is determined by the Internal Revenue Service (IRS) each year. For 2022, it’s $20,500. However, if you’re over the age of 50, then you’re allowed an additional $6,500 in catch-up contributions, also determined by the IRS.
To learn more about this year’s contribution limits, read the guide from the IRS.
#4: What is an employer match?
Many companies offer a 401(k) match as an incentive for employee participation in the plan. Employer matching involves free money being contributed to your 401(k) account by your employer. Depending on the terms of the plan, your contributions may be matched up to a certain amount by your employer, which is usually a percentage of your salary.
For example, if your employer offers a 3% match, then if you contribute 3% on your own, they will match an additional 3%, totaling 6% of your annual salary being contributed to your 401(k) each year.
Regardless of how the plan is structured, if there’s free money available, take advantage! Learn more about employer matching and how it works in the Slavic401k blog.
#5: What is vesting?
If you have employer matching as part of your 401(k) plan, then the employer’s contributions likely fall into a vesting schedule. A vesting schedule is used for employer-sponsored retirement accounts to ensure that company funds are not fully given to an employee until a specific amount of service is completed, typically between two and five years.
For example, an employee who has worked at the company for two years may be vested in 50% of the matched funds, whereas an employee who has worked there for four years, may be eligible for 100% of the funds. Vesting schedules operate differently at every company, so make sure you read about your plan to ensure you are maximizing your benefits.
Learn more about vesting and the different types of vesting schedules here.
Participating in a 401(k) plan is a great way to save for your future. Before you enroll, make contribution changes, or change your strategy, make sure you discuss your goals with a financial advisor so you can optimize your plan.
To learn more about making, saving, and spending money, visit the Slavic401k blog.