Before autumn starts flying by too fast, take a moment to pay attention to your retirement account. This is a good time for to check in on a few fronts: how much you’re contributing, what investments you’re choosing, and how your funds are allocated.
Start with your contribution levels. At minimum, you should be saving at least up to the company match in the plan, if there is one—even if you have student loan debt. This is free money, so if you are falling short of the match, you’re essentially walking away from additional compensation. If you’re in your 30s, you should aim to put aside at least 10% or 15% of your pay, not including the employer match. And if you are in your 40s or 50s, you should be maxing out your plan to the federal limit of $18,000.
Check your allocation. Are you taking the right amount of risk? Many like to rely on the old calculation of 100 (or maybe 110 or 120) minus your age to determine the allocation to stocks. But a formula like that doesn’t take into account your comfort with swings in the market. That’s why it is advisable to take a risk assessment questionnaire, which is available on most retirement plan provider sites. Just remember that you may overstate your ability to tolerate risk, especially now that the market has come roaring back since 2009. To get an accurate reading, try to remember how awful you felt during the 2008-2009 plunge.
Once you walk through the test, most sites will populate a recommended portfolio allocation with funds that match your feelings about risk and your investment time horizon. Don’t drive yourself nuts fine tuning the mix. Having a game plan, and sticking to it, is more important than whether your portfolio is 60% stocks/40% bonds or 55%/45%.
While you are at it, be sure to create a plan for rebalancing — or sign up for auto-rebalancing, if your plan offers it — so that your allocation remains in check.
Reassess your funds. Your employer 401(k) may offer you a limited set of options, but aim to use index funds whenever possible, because they are the cheapest way to invest.
If you are just starting off, you may be tempted to use a target date fund. Be careful, though, because some of these funds are riskier than many people realize. If you can find an allocation that works and your plan does auto-rebalancing, that might be a better option.