How many times have you heard about your retirement this week? Well, you need to hear about it once more.
You probably understand the basics. You know you want to take full advantage of 401 K match plans, and you understand that tax advantage is a good thing.
What you may not realize is that the average 401 K loses 20 percent of its total value to fees over a 30 year period. Mostly, this is because the fees accumulate interest in the exact same way the savings plan does.
Fortunately, there are some quick lessons and easy resources that can help you minimize those fees and get much more out of your retirement.
Avoid Active Management
If you aren’t already familiar with this concept (and financial account managers love to sell it), basically a managed account will pair your 401 K with a professional investor. He or she will be responsible for buying/selling stocks in an attempt to push earnings to their highest potential.
Now, to be fair, good investors can see returns a few percent higher than unmanaged accounts, but the fees are rarely worth it. In a lot of cases, the fees will completely offset the additional growth, so you’re really not gaining much.
Instead, you can invest in an unmanaged account, minimize fees and see a much healthier and safer retirement plan. That doesn’t mean you should avoid managed investment altogether; they’re still a great way to tackle any higher risk portfolios that you want to try to build.
Tax Advantage
You’ve likely been steered in this direction, mostly because it’s the default advice anyone who understands retirement will give. Your 401 K is surely earning you some tax advantage, but it might not be maximized. Your income bracket and age both factor into how much you can put into a 401 K without being taxed.
In a lot of cases, you have room to invest more than your company match. While you don’t get the obvious benefit of that match, you can still defer taxes on large chunks of income.
If you really want to get the most, open an IRA and fill it to the tax-exempt maximum too. The more you save on taxes, the more interest you stand to accumulate in the long term. Of course, you want to make sure you don’t overdo it. Never invest in retirement to the point that you struggle in the now.
Index Funds
Every time you buy a stock, there are fees. The amount those fees cost depend on the stock, but index funds are far and away the lowest fee option out there. You always want a diverse portfolio for the most stable gains. Still, index funds offer that diversity. Any interests you have can be matched to the appropriate specialty index.
You may not want 100 percent of your 401 K to be in index funds, but the more you can reasonably shift in the direction, the more you will save on accumulating fees. It’s an often underutilized way to boost retirement savings.
Turnover
Every stock purchase has a fee. Every. Single. One. A lot of accounts are designed to have regular turnovers. One of the most common approaches is annual turnover.
Large firms can do this with huge numbers of their clients’ accounts to subtly push market values in their favor. It probably also contributes to their incentive that they get to bill each of those sales.
Now, a certain amount of turnover is necessary to make sure you aren’t holding stocks with a bleak future, but you want to minimize the amount of automatically scheduled turnover. In general, shooting for a ratio under 50 percent is an attainable and effective goal.
Analyze Your Fees
Whether you look to your investment firm or free online tools, it’s pretty easy to get an accessible breakdown of all of your 401 K fees. In all honesty, you should probably consider a few of these different resources just as a cross reference. When you can plainly see all of the fees, it’s much easier to figure out where you can make big savings.
The worst fees to watch out for are regularly scheduled and cumulative. You can also compare how a group of stocks are earning money vs how much the fees are to move money around and invest more efficiently. The numbers aren’t too tricky, but you can always consult an expert if you want to be extra careful.
These tricks are enough to get you on the right path. Overall, you want your expenses to be below 0.5 percent annually. The national average is roughly 0.76 percent, so you can see that there is room for a lot of improvement.
Regards,
Ethan Warrick
Editor
Wealth Authority
