10 Tips To Manage Your Personal 401k

The 401k is a common investing tool with many companies offering this option for retirement investing.  It’s often managed by employees themselves.  But most of the time employees have little to no knowledge of investing and therefore are susceptible to making a wide range of mistakes that can impact the growth of their assets. But, follow these 10 simple rules to managing your personal 401k and you’ll do just fine.

1. Take advantage of free money and participate

If you’re on the fence about investing in a 401K you’ll want to think about the free money you may be losing.  Some employers provide matching up to a certain percentage of your investment.  This is free money we’re talking about!  Make sure you invest up to this minimum even if you’re still trying to save for emergencies and pay off debt.  Keep in mind, only do this if you’re still able to make forward progress on these other important goals.

2. Don’t be afraid to seek assistance from an expert

While a 401k is a self-managed retirement plan, don’t ever think you have to manage it on your own.  Just because your friend in the cubicle next to you brags he should have been a financial advisor given his 401K returns doesn’t mean you have to accept the same level of responsibility.

Take advantage of the financial management company your employer uses and seek advice on the right investment allocations for your situation.  Better yet, conduct some research, talk to some friends or family and find a financial advisor who you can trust to help guide you in the management of investments.

3. Review your investments, but not too often

It’s easy to get into a habit of reviewing your investments regularly, but you need to keep a long-term strategy in mind.  Again, your buddy next to you may be touting his return last month, but ignore him!  A good rule of thumb is to review at a maximum each quarter (if you like to look often) and no less than once per year.  This could mean you visit with your financial advisor, or review the investments yourself.  But bottom line, avoid the temptation of logging into your account everyday.

4. Ignore market panic

Obviously, with the recent economic down-turn many investors jumped ship fearing large financial loss.  If you’re the type of person who gets worried based on the latest economic news or results from Wall Street for the day, you need to find some ways to turn off these fears.  Accountability is probably one of the best ways I can think of to help you do this.  Again, find a trusted financial adviser who can talk sense into you when you’re thinking about getting out of the market too soon.  But another bright idea is to limit your exposure to media such as news, magazines and the internet.

5. Don’t wait until the right time to invest

Truthfully, there is never a right or perfect time to start investing.  Just get started.  It’s sort of the same principal as having children.  If you wait until the right time, you’ll never have them.  Don’t think you need to wait until you have more money coming in each month.  Train yourself to manage what’s remaining after your investment.  My advice – take care of the basics (1 month emergency fund and debt) and then get started  investing.

6. Reallocate investments

Most wise investors will try to allocate across different investments based on their situation and retirement investing strategy.  Some people go overboard with reallocating each month, but you only need to do this once per year if you want to keep your allocation mix.  This is a simple thing to do through most accounts when logging in via the web.  There is typically a page in which you can view your current allocation and rebalance with the click of your mouse.

7. Choose your funds wisely

Okay, if you’re a novice investor who is managing your investments yourself, you need to make sure you choose them wisely. It’s easy to invest, but not so easy to choose the right investments sometimes.  Websites like MorningStar.com can help you identify mutual funds with 3 – 5 years of good return history.  You also need to consider the right type of investments for your situation and investment strategy.  This will differ per individual, but a good financial advisor can make recommendations for you based on your goals and a number of criteria.

While it may be tempting in certain situations to borrow money from your 401K, you want to avoid it if possible.  First, you’ll lose the power of compounding your investments and returns.  You’ll also pay interest on your loan (although, to yourself), but it will be at a much lower rate than the return you would receive on your investment to begin with.  And finally, if you leave your employer, you’ll have to pay the loan back almost immediately.  So again, avoid borrowing, the associated headache and loss of your returns!

Are you think thinking about requesting an early withdrawal of your 401K?  Avoid this too, if possible! Congress provides a way for you to withdraw money for certain hardships, but it will cost you in penalties and taxes!  First, you’ll pay a 10% penalty if your younger than 59 1/2.  You’ll also pay federal income taxes, so make sure you understand these tax implications by speaking to a tax professional before making any moves.

Finally, investing in a 401K, or other investment vehicle should not be a short-term strategy.  Obviously, congress set the minimum withdrawal guidelines for a reason.  Unfortunately, many people invest in a 401K for retirement, but manage it like they’re day-trading stocks.  If you get caught up in fluctuations of the market as described above, you’re in for an emotional roller coaster ride.  Rather, take a steady long-term approach to growing funds for the years ahead.