Personal Finance 101 – New Year’s Resolutions for Your Retirement Plan

By Brittany Mollica

Many of us are thinking about our New Year’s Resolutions as we celebrate the start of the 2020s. While most resolutions are related to physical health, we’ve put together some suggestions for financial health resolutions, particularly for retirement accounts provided by your employer (401(k), 403(b), TSP, etc.).

If you work for a large employer, you are likely eligible to participate in one of these retirement savings plans. If you use your plan properly, the long-term financial health benefits are tremendous, so these resolutions are worth considering!

In 2020, I resolve to….

Increase my contributions to the minimum amount needed to receive my full employer match.

Make sure to take advantage of this employee perk, since your employer is offering to put extra funds into your account. You just need to make sure you’re saving the minimum amount! We’ve said this before, but it bears repeating: you should accept free money.

Increase the amount I contribute every year, or temporarily increase my contribution whenever I receive a bonus.

If you get into the habit of regularly increasing how much you’re saving, you could soon be contributing the maximum allowed amount. We suggest increasing your savings by an additional 1% each year, or temporarily bumping up the percentage you’re saving right before you receive a bonus.

Note that for 2020, the maximum amount you can defer as an employee to your 401(k), 403(b), TSP or (most) 457(b) plans is $19,500 ($25,500 if you’re over age 50).

Review my strategy for taking a loan from my retirement plan.

Some retirement plans will allow you to take loans from the account. We believe that if you need money for a surprise expense, it’s best if you already have a cash reserve in place.

But if you find you need to borrow money for a surprise expense, a loan from your retirement plan can be an efficient and low-cost alternative to borrowing from a bank or using your credit card. This is because the “interest rate” on a retirement plan loan is often lower than market interest rates, and instead of paying interest to a financial institution you are really just paying yourself “interest” back into your retirement account.

However, you need to be careful – a loan against your retirement should only be used to cover unexpected necessities. Make sure you understand the loan repayment schedule and what can happen if you leave your job or get laid off. If you are unable to pay back the loan when it’s due, it can count as a taxable distribution from your account that may include early withdrawal penalties. This could get very expensive!

Instead of taking a loan from your retirement plan (or having to charge a credit card),we recommend you set aside extra cash ahead of time to cover unexpected expenses.

Learn more about my investment options and make sure I’m invested in a diversified portfolio.

You will likely have a handful of options for investments in your retirement plan. One of the most common choices is what’s known as a “target-date fund”: this is a single investment that holds a mix of stocks and bonds. The allocation between stocks and bonds in these funds is based on your target year for retirement. As you get closer to the fund’s target date, the manager will automatically move money from stocks to bonds, reducing the risk in your portfolio.

There is no shame in using a target-date fund – it’s simple and effective – but you may prefer to create your own mix of investments. If you do, it’s important to understand what you are selecting. If you’re picking your own investments, we recommend that you stay diversified and invest in a mix of cash, bonds, U.S. stocks and international stocks.

These resolutions will be easier to stick to than a weight loss or exercise plan. And if you do everything listed here, you could feel the financial benefits for the rest of your life.

Whether your New Year’s Resolutions are related to your physical health or financial health, we’re here to cheer you along. Let us know if you’d like to talk – and happy New Year!

 

This material is provided as a courtesy and for educational purposes only. Hilltop Wealth Advisors does not provide tax advice.  The tax information contained herein is general and is not exhaustive by nature.  Federal and state laws are complex and constantly changing.  You should always consult your own legal or tax professional for information concerning your individual situation. 

Asset allocation and diversification do not assure or guarantee better performance and cannot eliminate the risk of investment loss.