Tuesday, October 16, 2012
Why You Should Read Your 401(k) Statement
When is the last time you took more than a few seconds to review your quarterly 401(k) statement? Most people only take a quick glance to see if they made or lost money over the last three months before placing the document in a filing cabinet. The reality is if it has been more than a year or two since you reviewed your 401(k) statement in detail, you are likely putting your financial security during retirement at risk.
The most significant reason a 401(k) account should be reviewed at least every couple of years is that an investor’s risk tolerance changes over time. A wise investor is likely more conservative and less willing to take excessive risk at age 65, on the doorstep of retirement, than he was at age 60. Assuming the investor intends to retire at 65, if the stock market performs poorly and suffers a large loss when he is 60 years of age, the market still has a significant period of time to recover before the investor will need to withdraw money to fund his retirement. However, if a portfolio suffers a large loss right before the investor retires, he will likely need to delay retiring or reduce his spending during retirement in order to avoid outliving his money. For this reason, an investor should continually make his portfolio less risky as retirement nears. This can be done by constantly shifting a larger percentage of a portfolio out of risky investments such as stocks and placing those funds in more secure investments like bonds or money market accounts. Speak to a financial planner for guidance on how aggressive your portfolio should be given your career stage.
Another basic reason you should carefully examine your 401(k) statement at least once a year is to ensure you are utilizing high performance, low cost investment options. While it is important to remember that your 401(k) plan is a long-term investment vehicle and that changes within your portfolio should not be frequent, why not ensure you are investing in the highest quality options available to you? What may have clearly been the best international stock mutual fund available when you signed up for your 401(k) plan may have since suffered through some sub-par years of performance, changed investment managers, or even raised its fee. Occasionally monitoring the investments within your 401(k) plan will help ensure your retirement account functions like a well-oiled machine.
The simplest reason to occasionally review your 401(k) statement is to ensure your account is being rebalanced. Suppose you determine that you don’t want a portfolio any more aggressive than 50 percent stocks and 50 percent bonds. Now assume that stocks have a fantastic year while bonds endure flat performance. At the end of the year, you may have a portfolio that is now 60 percent stocks and only 40 percent bonds. Your portfolio is now more risky than you intend it to be, which could leave you susceptible to unacceptable losses. Analyzing your plan statement at least once per year will allow you an opportunity to verify your portfolio is being rebalanced, and if it isn’t, hopefully motivate you to rebalance it yourself (or hire someone to do it for you).
A 401(k) plan is a tremendous asset when incorporated into a retirement plan. Automatic, tax-deferred savings will be a vital element of every financial future. Pay sufficient attention to your account to maximize the probability you will enjoy the retirement you envision.