Nearing Retirement? Your 401k Needs Some Attention!

By its very design, the 401k plan is more or less a kind of “set it and forget it” type of plan. The idea is that if you save money regularly on a pretax basis, and never see the money in your paycheck, you won’t pay much attention to it, you won’t meddle with it, and it should grow over time. And that can be a good thing, especially if you’ve got 20 years or more until retirement.  

If that’s you, maybe you’ve dialed it up for growth, and each pay period you just allocate your new contributions equally across each of your existing funds.  Many, if not most, people do exactly that, and generally speaking, that’s okay.  

Review Your Allocations

But if you’re only, say, 5 or even 10 years from retirement, it might be a good time to take another look at your allocation. If your allocation is still 100% growth at that stage, you’re probably taking more risk than you should. A common strategy is to reduce your exposure to stocks as you approach retirement, which acts as a kind of hedge against the market potentially going down at precisely the same time that they’ll need some of that money. And THAT kind of strategy makes good sense. 

So let’s say you decide to do this: to potentially counteract any volatility, maybe you reduce your allocation from 100% pure growth to a more balanced portfolio with some of the money, or into a stable value fund as retirement gets even closer – that way, you’re hoping to protect some of your funds from declining in value. So now, hypothetically, at 60 years old, you’re perhaps 20% in stable value, maybe 35 or 40% balanced, and the rest still in pure growth, because that’s what your particular investment strategy calls for. Just making these numbers up. 

Review Your Contributions

But here’s where we think you should amend your long-held strategy just a bit: because your asset allocation changed, your contribution strategy should also change. In other words, if you just continue to allocate your new 401k contributions each pay period across the board, you may be making a big mistake. You don’t want that new money going 20% into stable value, 40% into balanced, and the rest into growth in this made-up example. Why? Because you’re not gaining any advantage by doing it this way. 

Here’s the deal: We know the markets will have volatility. We know there will be up and down days, weeks, and maybe months. So with all of this expected volatility, where should our new contributions go? Where can we potentially get the biggest bang for the buck? In the less volatile area? The one that’s earning 2, or 3, or 4 percent with no real volatility, and no ability to dollar-cost average? No! It’s more likely to come on the pure growth side, the volatile area, the one that’s going to be up and down on any given week, given month, or given year. Over the short term, you’re going to very likely see ups and downs with that section. But over the long term, after 10 or 15 years, it could potentially do very well. 

Remember, that’s the section of your 401k that you won’t touch for a decade or more. The volatile side. The more stable side will be the money that you’ll access over the next 5 years.  These are the funds you’ve set aside, money that will sit there just in case the market drops. It’s there so you can still get to it even after a market drop. It’s there to buy you time so you can continue funding the growth-oriented assets and take advantage of dollar cost averaging into the volatility of the market. 

The set-it-and-forget-it nature of the 401k is a great way to get people to save, but it can also come back and bite you if you’re not paying attention when you’re getting closer to your time to retire. Right now might be a really good time for us here at Lucia Capital Group to take a look at your own situation to see if you’re lined up with your goals.  Just give us a call. As always – we’re here to help.