It's Valentine's Day, and one thing I look forward to just as much as all the flowers and candy is the opportunity to reflect on the lessons I've learned about love -- and how these apply to other areas of my life. You've probably heard the comparison between a first date and a job interview, but have you ever thought about what love can teach you about your finances?
Retirement planning actually has a lot in common with romance. Here's what I mean:
Finding your perfect match is all about getting what you put in. We all know that relationships require an investment -- of time, energy and feelings - from both parties. While you may be the one responsible for funding your 401(k), in many cases, your employer will also contribute some matching dollars. For example, a company might offer a match of 50 cents for every dollar you contribute, up to a certain percentage of your salary. If your employer offers a match, take advantage of it in full. The match is like an automatic return on your investment that you can't get anywhere else. In fact, I always say this should be your number one financial priority, even before paying down debt.
There comes a time when you should take it to the next level. When you're getting serious about retirement planning, you may realize that the contribution level required to get the full employer match simply isn't enough to help you meet your long-term savings goals. A recent survey* found that nearly 30 percent of participants have either decreased or not made any changes to their 401(k) savings rate in the last two years -- which could seriously derail or stagnate their savings efforts. To maintain a healthy relationship with your 401(k), try to increase your contribution by a percentage or two each year until you've reached a level that is optimal for you. If you've recently taken home a bonus, gotten a raise or are expecting a big tax refund, your 401(k) is a great place to direct some of those dollars.
Love is patient, so stay the course when things get bumpy. When things aren't going as well as they once had, it can be tempting to call it off, but working through tough times can often yield better results. Likewise, when it comes to your 401(k), riding out market volatility may help you stay on track towards your retirement goals. In times of market volatility, it's important to remember that panic isn't a strategy, especially with an investment as long-term in nature as a 401(k). Markets go up and markets go down, but history has shown that over the long haul, they've gone up.
Venturing outside your circle can increase your chances of success. What do dating and 401(k) investing have in common? Diversifying your options is a key to finding what works for you. In the case of your retirement plan, make sure you have a mix of assets that's appropriate to your risk tolerance. Also check to make sure you aren't overloaded on your employer's stock, no matter how well it has performed.
Cleaning house after a breakup is good for you. If you've split from a job in the past few years, you may still have a 401(k) from an old employer. Make note of any older accounts and explore your options for the best way forward. You can roll an old 401(k) into an IRA, move it to your new plan or just leave it alone. If you choose the last option, your account may continue to grow in line with your investments but you'll no longer be contributing to it, so you might pay less attention to things like asset allocation that should be adjusted over time. With that in mind, be sure to take a stroll down memory lane every once in a while if you have a plan with a prior employer.
If you need advice, talk to a professional. Everyone from your parents to your friends to your coworkers may be willing to give their two cents about your relationship, but it can be hard for someone close to you to be objective or have all the answers. Why not seek advice from an expert? The same principle applies to your 401(k). Many 401(k) plans offer access to a managed account service that can help you with things like asset allocation, contribution levels and individual fund selection. Our data shows that people who take advantage of independent, professional 401(k) advice tend to increase their savings rate, are better diversified and stay the course in their investing decisions.**
Like any relationship, your commitment to your finances shouldn't be observed just one day a year. A 401(k) requires periodic maintenance throughout the year and over the course of your career. Happy saving and Happy Valentine's Day.
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*2015 401(k) Participant Survey conducted by Koski Research for Schwab Retirement Plan Services, Inc. Koski Research is not affiliated with Schwab Retirement Plan Services, Inc.
**In-depth behavior analysis of point-in-time advice provided through 401(k) plans serviced by Schwab Retirement Plan Services, Inc., 2010. Retirement plan investment advice is formulated and provided by GuidedChoice Asset Management, Inc. (GuidedChoice®), which is not affiliated with or an agent of Charles Schwab & Co., Inc., Schwab Retirement Plan Services, Inc., or any of their affiliates.
For general informational purposes only.
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