The 5 Components of a Perfect 401k

perfect 401k For the average American, managing a 401k sounds like a painfully complicated problem that haunts you for a lifetime.

That’s because in most cases, it is!

Have no fear – with the correct guidance and knowledge, 401k management can be a piece of cake, even for a beginner. After all, it’s a retirement plan that allows you to save up tons of money in a tax-efficient manner, with many companies offering to even match your savings. Take a look at my basic tips to get the most out of your 401k…and you’ll be a few steps closer to lounging on the beach with a margarita and grayer hair!

Diversify like a die-hard

To recall the famous old saying, “Never put all your eggs in one basket.” This is perhaps the wisest advice to follow regarding your 401k.

Diversifying your assets is one of the best ways to reduce risk and maximize return. If one investment option suffers, the others will remain intact. In fact, they could be inversely affected, like in the case of many asset classes of stocks and bonds.

Unless you have a background in finance or a boatload of free time to learn, it’s tricky to know how to allocate your funds in a way that truly maximizes your savings. The most basic rule is to spread your assets around in multiple funds rather than keeping them in a single one. But how do you choose? There’s no easy answer, but this asset allocation calculator might steer you in the right direction.

Slow down, you haven’t hit the 401k success jackpot just yet – pay close attention to the next tip or risk a permanently-burnt hole in your pocket.

Reduce your hidden fees

Whoever said, “What you don’t know can’t hurt you,” clearly never wrestled with hidden 401k fees.

According to a 2016 NerdWallet study, a whopping 92% of Americans had no idea how much they were paying in 401k fees – an alarming statistic that illustrates just how many people are losing hard-earned savings without even realizing it.

Investment fees are typically the loftiest type of fee, but luckily a kind you can usually control. These fees can be reduced by simply choosing to invest in funds that have lower expense ratios. Administrative and service fees, however, are more difficult for you to reduce, as they are an innate part of your provider’s plan.

Want to see how much of your money is potentially being eaten away by swarms of vicious investment fees? Use a hidden fee calculator for an estimate. Warning: the result might reality-check you into immediate action.

Keep your cool, even in a bear market


Remaining emotionally composed even during hard times is key to a stable 401k, as it truly pays off to focus on long-term rather than short-term goals.

Listen up. The stock market will fail – possibly many times – throughout your life. It’s silly that so many people panic out of fruitful investments the moment the market begins to dip; this is a big mistake, as the economy historically improves with time.

Pulling out of your investments because of volatile conditions will almost always result in suppressed returns. Instead, stick it out – you’ll be ecstatic to see how things look when the market inevitably picks back up, as it has done after the past 14 declines:

Source: S&P 500 Bear Markets (Declines Greater Than 10% But Less Than 20%) 1965-2014 February 2015.


Match up to max out

If your workplace handed you free money, wouldn’t you take it?

That’s exactly what 401k matching is – FREE money from your employer that you get just by investing in your 401k. Seriously, it’s a guaranteed return.

The more of your own money you invest now, the more free money you’ll receive down the line. The first step is to find out what your company match is (ex: an employer might match  up to 5% of the salary you contribute to your 401k). Secondly, set your contribution to at LEAST that amount. Thirdly, if you can do more…DO MORE!

Trust me, your future self will thank you.

Take advice from the pros

There’s no doubt that the 401k management process is one of the most important yet often underserved components of the personal finance world. Even though I tried to simplify things in this blog post, chances are you might still need a bit of assistance to totally optimize your 401k.

If you want your savings to be stretched to the fullest potential, paying for professional advice can be worth the cost. The downfall is most financial advisors require an account size minimum of at least $500,000. Even more frustrating, the management fees often take a beating to your bank account of at least 1% per year – AKA a minimum of $5000 annually. Yikes.

There’s still hope! Take blooom for example. They’re a robo-advisor that manages 401ks, goes for just $10 per month and accepts all account sizes, no matter how big or small. This could be a good option for those who don’t have the time to D.I.Y. or the money to fork over for traditional help.

See my other posts on smart ways to figure out your 401k.

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