Mastering Your 401(k): Understanding Your Investment Options

In order to produce the podcast and keep content up free for you, I work with partners so this post may contain affiliate links. Please read my full disclosure for more info.

Want to get the most out of your 401(k)? Learn the key guidelines on how you can choose the best investment options for you! 

Making the Most Out of Your 401(k)

Chances are if you’re investing for your retirement, the bulk of that money is stashed away in your 401(k).

For those whose employers offer them, they’re an easy option to sign up for and contribute towards.

But are how comfortable are you with how it is doing?

To help sort things out, Jonah Kaufman is joining me for this episode.

Jonah is a financial advisor at Coastal’s Wealth Management Services.

These will give you some starting points and ideas on what you need to talk about.

In this episode we’ll discuss:

• Why your 401(k)s are a great foundation for retirement savings
• What factors to consider when you’re investing
• Understanding some of the different options that your 401(k) may offer

Hope you enjoy!

[smart_track_player url=”http://traffic.libsyn.com/couplemoney/S9E6_Mastering_Your_401k_How_to_Choose_The_Best_Investments_for_You.mp3″ background=”default” social_pinterest=”true” ]

Just to make sure we're on the same page, this episode is NOT about specific investment advice.

You would need to consult a qualified financial professional who can evaluate your unique circumstances.

Resources to Stay on Top of Your 401(k)

Here are some resources to make managing your money much easier!

• Best Budget and Money Apps: Personal Capital, Tiller, Mint
• Free 401(k) Analysis: blooom
• Grow Your Stash Faster: High Yield Savings with CiT Bank
• Jumpstart Your Marriage and Your Money
• Master Your 401(k): How Much Do We Need to Contribute?
• Master Your 401(k): Why You Need to Keep an Eye Out for Fees
• Robots Can Manage Your Money. But Even They Need Humans
• A Smarter Way to Think About Financial Decisions

If you’d like to chat more about your financial goals,  please join us in our private and free Facebook group – Thriving Families.

Thank You to Our Sponsor Coastal!

Support for this podcast comes from Coastal Credit Union! If you’re living in the Raleigh Durham area and looking to bank better, come check out Coastal today.

If you want to be better prepared financially for retirement, please check out Coastal's 401(k) Planning Calculator.

Big Benefits of 401(k)s

Elle Martinez: There are some huge financial advantages to investing in your 401k.

Many of the 401ks offered at work, have your contributions go in their pre-tax, which is a double. That means your contribution has more money going into your account. Great. As you want to invest as much as you can for when you retire.

Since that money is taken out pre-tax, it lowers your taxable income.

Now you won't owe taxes on your contributions until you begin withdrawing from your 401k during retirement. Now, if your company offers a Roth 401k, it's the reverse meaning you're taxed on your contributions now, but can withdraw. Tax-free come retirement. Another plus that comes with 401ks is that your company may offer a match for your contributions.

Think of it like a bonus for making a smart mini move. If your company has this program, when you set aside a certain percentage or contribution from your paycheck, they will match it. And depending how much you pitch in that can be a significant amount. For 2019, your 401k contribution limit is 19,000.

If you're under 50 for those 50 and over, you also have a catch up contribution limit, and that's going to be $6,000. Don't worry if you're not in a position to max out your 401k yet, starting earlier, as crucial as compound interest can have a huge impact on your savings.

Should We Invest While We're Paying Off Debt?

Elle Martinez: One question I've received quite a bit is whether you should invest when you're in debt.

The answer is….it depends.

A few things you two need to consider and discuss are what kind of debt you're tackling and how much money you wiggle room you have in your budget.

If you have high-interest debt like credit cards, you might want to go ahead and put just the minimum to get the match, and then direct all your attention and extra money to paying those debts off first.

Why?

Because the interest rate on your debt is most likely going to be higher than the return you get with investing.

It's kind of like being in the middle of a lake with a boat and a large hole in the bottom. You have to fix that problem first.

If you run and review the numbers, you have two viable choices:

• direct all your money towards getting rid of the highest interest first
• contribute just enough to get that match and then directing the rest of your money

Either can work, but depending on how much debt you're carrying, you may come out ahead with the second one, believe it or not.

This is one of those personal choices that come up with personal finances so you have to make the decision that's right for you and your family.

What Kind of Investor are You?

Elle Martinez: Now that you have a better idea of how much you're gonna be contributing to your 401k, let's talk about investing.

Before you jump in and start weighing your options with what's in your company's 401k, it pays to take some time to consider what type of investor you are.

Josh Kaufman: Key thing that I always ask members and clients when understanding their risk tolerance and a human for investing. This would also apply to investing within the 401k. Do you have the skill, the will, and the time to manage a basket of investments or mutual funds?

Most of the time in this case, it easier to have something that, based on [your] projected retirement, if you will. Does the 401k have a mutual fund that maybe it winds up within Target retirement year, say 20 35, 20, 40, 25 etc.

Elle Martinez: Most of us, especially when we're starting out with our finances and with investing aren't subject matter experts on the topic and that's okay. You can always educate yourself and improve your skills in this area.

There are many free and affordable ways like this podcast books, sites, and courses that you can learn. Then there are financial experts like Jonah who have the training and expertise in the desire to help you craft a financial plan that fits with your goals.

You don't feel like you have to become an expert to invest wisely. You should though have a solid foundation and that includes understanding your risk tolerance.

Understanding Risk Tolerance

Josh Kaufman: It's important to define your risk tolerance and your risk tolerances. How much can you handle? The movements of the stock market or bond market or whatever the underlining market you invest in and typically an investor is going to be diversified and have assets in both of those two markets for that matter.

But 401k specifically, usually has some sort of risk tolerance worksheet whether you do that online, a tutorial, or a sign up, or you do that just on a periodic basis.

These can help give you a score and that score might help you on a scale of one to 10. Yeah. Or one to a hundred assess where in a risk tolerance ranking provided by the 401k provider, you may land.

Elle Martinez: fall when you have an idea of what you're comfortable with. It's easier to figure out what you should be investing in. So

Josh Kaufman: that being the case, these types of models can help someone that doesn't necessarily have the time or the world to go in and make regular changes, know that they're properly.

For someone that chooses to be more hands on. Typically you'll see a 401k has a few options that are not target retirement or target funds. Mm-hmm and the investor follow the risk tolerance questionnaire. Define. How much of a particular asset class is right for them. And then define a period whether that's quarterly, semiannually, or even annually to go through and review the performance and make sure that they're still in the right allocation for their risk tone,

Elle Martinez: every company has their own 401k plan. So your employer may have a plan that has a lot of different options. Or yours may be a little more limited with the choice to keep things simple. We're gonna group investments today into three basic types. Target date funds. Actively manage funds and index funds targeted funds are becoming a more popular option.

According to Vanguards, how America saves report for 2019, they found that in 20 18, 9 out of tens plan sponsors offered target date funds. And 52% of all Vanguard participants were invested in a single target date fund. Jonah explains how they can be appealing to certain investors.

Josh Kaufman: Now for the investor that doesn't have the skill well in time mm-hmm these are a good investment just based on how they're allocated the mutual fund company or provider is gonna designate the underlining investments to reallocate typically on an annual basis.

Mm-hmm based on where their analysts feel. An investor or saver should be relative to the year associated with the fund. So right now, if a investor is maybe starting out in retirement, maybe they're or in their 401k savings, maybe they're looking at a target retirement 2055 to 2060 in the allocation of this fund may be.

90 to 95% in the stock market. Mm-hmm and the remaining five to 10% is in maybe the bond market or the cash portion of the fixed income market. So, you know, that's when an investor doesn't necessarily have the time and doesn't have the energy to say, yeah, I feel comfortable going in and doing this.

Elle Martinez: The second category of investments you may see in your company's 401k.

Is an index fund.

Josh Kaufman: So with respect to an index fund, an index fund, which a popular one by name that mm-hmm, maybe recognizes the standard and poors or S and P 500, an index fund is considered a passive investment. That is. Put together by the publisher of a specific indice, basically a, a report, they put together a regular report and this indice report is going to define a certain goal.

And it's something that the publisher is creating this report, but is not going through in actually selecting a stock. Or a bond or the underlining investment, but an indice as a whole tends to be more of a passive investment.

Elle Martinez: And finally we have actively managed mutual funds. And from our personal experience, looking at the 401k offerings, that seems to be what the majority

Josh Kaufman: are a mutual fund that is considered actively managed, has a team maybe, or a individual with analysts working under them.

That is gonna help them. Define the best assets to hold based on the goal of the fund mm-hmm . So for instance, a growth mutual fund that's actively managed may have a goal of purchasing 75% or more of growth stocks that fall into the large cap space. And they have the ability if the stock underperforms, or if they feel like a stock is gonna be a great performer in the future.

They have the ability to go through and trade out the stocks as they see

Elle Martinez: fit something you may wanna consider when reviewing your investment options is evaluating performance and expenses, because it can vary greatly fund to fund.

Josh Kaufman: Now, the underlining actively managed funds. They tend to be a little more expensive because you are paying for someone mm-hmm

Are actively making decisions on behalf of the mutual fund for the investors, whereas the S and P 500 or any other indice being a passive investment. It's not going to make certain moves. If it sees different financial reports about a company, the S and P 500 is a representation of the us economy.

Mm-hmm and being a representation of the us economy. When they publish that report, they may change. Sectors over time where you might see that manufacturing is not as much of a weighted portion of the United States, annual GDP mm-hmm and maybe tech and industrials are. And so you'll see an uptick in certain companies and a downtick in others, but by and large being a passive investment, a industry tends to have a much lower.

Internal charge or expense because there isn't, or you're not paying as an investor for the expertise and management of the underwriting group that sponsors the. Expense ratio is effectively the cost to manage the fund. So, you know, the lower, the expense ratio, it might be that, you know, it is something indexed or more passively managed, whereas something may have a higher internal charge because it is again or a higher expense ratio because it's more.

Actively manage.

Elle Martinez: So please make sure you do your research upfront with your investment options. Whether you go with target date, actively manage or index funds, understand what you're getting. And just because something costs more has higher expenses, doesn't automatically mean that you're gonna get superior results.

You really wanna look into this. So, however you decide to invest, make sure that you are understanding what your options are and that you're comfortable with. The strategy you're taking. The segment is brought to you by coastal credit union. If you're looking for better options with banking, please check out coastal.

They offer competitive rates with their checking and savings account, and you can speak with their wealth management services. For your particular needs, find out more at bank, better.org. Before we wrap up, I wanna focus on some key takeaways I got from speaking with Jonah and from preparing for this episode, the first one is, understand yourself as an investor.

There can be a huge difference between investment returns and investor returns. If you don't understand your risk tolerance and have an asset allocation that's aligned with it, then you're probably gonna have some problems with your investments. If you go too aggressive with your investments, when you're really more conservative, you're gonna be tinkering with them.

And more than likely, you're not gonna get the performance that you want. Jonah mentioned a resource that could help you out. Maybe having a worksheet to get a better idea of your risk tolerance, but you can also meet with a financial advisor, a planner to sit down and get a better sense of what type of investor you truly are.

The second is to make sure that you do your homework and objectively review your investments. Since we're talking about your retirement, you really wanna be comfortable with what you're investing. And then finally, Jonah had a great piece of advice about how often you two should check in with your investments.

Josh Kaufman: Mm-hmm long term investments like investments for retirement at minimum, twice a year. You wanna know how your account is doing so checking the balances twice a year. And then, you know, maybe when you check the balances also reviewing investment performance, but maybe annually having a major investment review.

Where you say, this is where I'm gonna make changes. Mm-hmm now making changes too frequently inside the accounts. You're not doing yourself, you know, any favors by trying to outthink what the market is gonna

Elle Martinez: do. If you'd like to connect with other families, working hard to stay on top of their finances, including their retirement.

Support the Podcast!

Thank you so much for listening to the podcast!

• Spread the word! If you enjoyed this episode and think it can help a buddy get on the path to dumping debt and become financially free, please share.
• Leave a review. Honest feedback and reviews make a big difference and gets the word out about the podcast. Leave your review on Apple or Stitcher.
• Grab a copy of Jumpstart Your Marriage and Your Money. My book is designed for a busy couple to set up their finances in 4 weeks. Get tips and tools that have worked for other couples on their journey of building their marriage and wealth together!

Music Credit

Like the music in this episode? Our theme song is by Gentle Regime. Additional music by Lee Rosevere.