Master Your 401(k): Optimizing Your Investments
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Want to optimize your 401(k) investments? Learn how you can minimize needless fees and choose an effective and efficient way to invest!
This post may contain affiliate links. Please read my full disclosure for more info.
When's the last time you two have reviewed your 401(k)? Don't feel bad if it's been awhile. We know firsthand how life can keep you busy.
The good news is that you don't have to pore over every single detail with your account or constantly login to keep things on track.
If you two implement some key principles, you can optimize your 401(k) (or 403(b) and TSP) to be better aligned with your goals.
401(k) Investments: Dig Deeper to Get Better Returns
Last week, we had another one of our Marriage and Money Workshops. It was a lunchtime chat and we streamed it to Facebook. Very energetic and lots discussed!
Chris Costello, blooom co-founder and certified financial planner, discussed with me how to master and maximize your 401(k) benefits.
During the workshop, we discussed:
- the big advantages with 401(k)s (and what to watch out for!)
- why human resources is not where you want to get advice on your 401(k) investments
- how much to contribute to your 401(k)s so you are giving yourselves a leg up on your entire financial picture
If you want to catch the entire workshop, you can watch it below.
Today we're focusing on how you can optimize your contributions so you're minimizing fees, increase your chances of getting better returns, and have your investments align closer to your goals.
Why You Need to Keep an Eye Out for Fees
While sometimes paying more can give you a high-quality item, that's not the case with investing.
One huge hurdle many managed funds have to overcome is their expenses and fees. Someone has to pay for the manager and the team and in many cases, that would be you.
Does performance of actively managed funds justify the fees and expenses that come with it?
Looking at the data, there seem to be no substantial correlation between paying these higher fees and getting superior results.
The picture that emerged once S&P did that was sobering, to say the least.
Over the last 15 years, 92.2% of large-cap funds lagged a simple S&P 500 index fund. The percentages of mid-cap and small-cap funds lagging their benchmarks were even higher: 95.4% and 93.2%, respectively.
In other words, the odds you’ll do better than an index fund are close to 1 out of 20 when picking an actively-managed domestic equity mutual fund.
So if you haven't already double check your current investments and jot down the fees associated with them and the returns you're getting.
Some may argue that these fees are relatively small, perhaps 1% or 2%. Is that really going to affect you when it comes to retirement?
I'm going to run the numbers using this handy tool to compare investment fees.
As you can see, over time, those so-called low fees eat a good chunk of your portfolio's money.
(Just in case you can't see the screenshot, an annual fee of 0.1% produces a difference of $49,204.39 over 20 years compared to a 2% annual fee.)
And I estimated that you would get the exact returns on each of the funds, which isn't the case with the historical data we have.
Over the long-term, actively managed funds tend to perform worse than their index fund counterparts.
So basically you're paying more money and less likely to get the returns you want.
How Index Funds Fit In with Your 401(k)
As you're looking at the investments available in your 401(k), check to see if there are any index funds.
While actively managed funds are trying to beat the stock market, with passive investing you're just trying to match it.
There index funds that track the S&P or a certain industry. The advantage of passive investing is that you're diversifying your portfolio with a single or a few investments.
Since they typically have lower expenses, you can see the appeal of them. With historically better returns, this can be an effective and efficient way to optimize your investments.
Get a Free 401(k) Analysis
Hopefully you two have a better idea of how you can invest your money, but of course each 401(k) is different.
If you want to see how your 401(k) is doing with fees and investments, go grab a free analysis from blooom.
You can uncover unnecessary hidden fees and get a clear picture of the investments available with your 401(k).
As a fiduciary, blooom has to put their clients' best interest first. So if you’re looking for an affordable way to get your finances squared away, check out blooom!
Catch Out Free Next Marriage and Money Workshop
This workshop was the last of this year, but we’re doing them all throughout 2018!
Don’t want to miss on out on these free marriage and money workshops? Stay in the loop and join the community here.
You get the latest and best episodes, articles, and video workshops we have. It’s quick and easy to sign up and yes, it’s free.
I’m excited to partner up with blooom with the 401(k) workshop and posts this week. While I’ve been compensated for the workshop, all opinions expressed are my own.
You can check over the numbers to see what's best for you – I've included links to my references.