You’re not putting money into your 401k retirement account for the heck of it, right?
You want your 401k account to grow and grow so that at retirement you have enough money to afford the lifestyle you have dreamed about, right?
To make your 401k account grow faster, you may need to make a few adjustments. These adjustments may seem like minor adjustments, but they all add up to making your 401k account more powerful.
Making Your 401k Investment Powerful:
#1 – Diversify: this minimizes the risk & increases the potential return
- Try to avoid investing all of your 401k money into only one asset class.
- That would be like putting all your eggs into one basket.
- Invest some of your 401k money into each of the 3 asset classes.
- These asset classes are: stocks, bonds and a cash equivalent or a fixed account.
- Each asset class offers a different risk and return potential; which is how you minimize risk and increase your returns.
- For example, when stocks are up, bonds are usually down and cash accounts balance it all out.
#2 – Dollar Cost Averaging: this spreads the risk around
- Dollar cost averaging is where you make the same deposit amount to your account at the same interval regardless of whether the market is up or down.
- You don’t determine your investment deposit based on market swings, you invest regardless of where the market is at.
- This will help you avoid getting caught in the cycle of buying high and selling low.
- You will be buying at a variety of prices.
- Since 401k deposits are payroll deducted, you are dollar cost averaging right now without even knowing it.
#3 – Avoid 401k Loans: this will provide continual growth
- To maximize your growth potential, avoid taking out 401k loans.
- 401k loans are financially unhealthy.
- While your money is out on loan, it’s not growing.
- While out on loan, your money is not compounding for you.
- You need an account balance for money to grow from.
- The higher the balance, the faster the growth.
- And 401k loans can be expensive if you don’t repay them.
- If you default on a 401k loan, you will have to pay taxes on the outstanding loan amount.
- Loans are even more expensive if you do not’ repay the loan and you are under the age of 59 1/2.
- If you are under 59 1/2 you have to pay taxes on unpaid loans plus a 10% withdrawal penalty.
Financial planners say that it’s the little things that count. Account diversification, dollar cost averaging and the avoidance of 401k loans may seem like little things, but they add up.
You owe it to yourself during your working years to make your 401k retirement account as powerful as you possibly can. If you don’t make your 401k account the best it can be during your working years, when will you, after retirement?
YOU are responsible for the success of your 401k retirement account; not your boss, not your financial planner. You have the power. Make some of the adjustments we discussed and be on your way to success.