Bankrate spoke with a number of financial experts to break down the top ways to set up your 401(k) to thrive in 2021 and beyond.This is the last of three columns outlining actions you should take.
Action 4: Avoid being too aggressive
If you have a long time horizon, it can be smart to get aggressive with your portfolio, but those closer to retirement should be careful, too. For retirees and pre-retirees, it may be time to shift into preserving your assets rather than trying to play catch-up.
"Yet many are focused on growing their assets — including aggressive investment strategies — rather than preserving their assets against sudden market downturns," says David Potter, former spokesman for MassMutual Financial, citing the company's research. "Many people may be taking more risk than they realize."
Potter suggests that investors reevaluate their portfolio regularly to consider how they would fare if the market declined significantly.
"Typically, financial professionals recommend that retirement savers dial back their exposure to stocks as they get within five years of retirement and within the first five years after retiring," he says. "A steep market downturn of 20 percent or more during those periods could irreversibly reduce your income in retirement."
Action 5: Consider rebalancing
The various positions in a portfolio grow at different rates, and over time the portfolio can move from its target allocations. Investors should look at their portfolios to see if they need to be rebalanced. Rebalancing returns the 401(k) from its current allocation to its target allocation.
For example, if your target allocation was 50% bonds and 50% stocks, it may have grown to 40% bonds and 60% stocks over the last few years as stocks soared. By rebalancing, investors can take some of their appreciated assets and buy underappreciated assets, effectively selling high and buying low.
Action 6: Think about opening a Roth 401(k)
If you're looking ahead a few years, you may also want to consider opening a specific type of 401(k) called a Roth 401(k). With the Roth version, you pay with after-tax money, but you're able to enjoy tax-free withdrawals at retirement.
Tax rates are relatively low, so now could be a good time to fund a Roth 401(k) rather than a traditional 401(k).
Bottom line: The 401(k) is an excellent vehicle to save for retirement, and it's a great time to join the many other workers who are securing their financial futures by saving and investing. Many of the top moves to make are easy and painless, and some can even reward you with a bonus for your effort.
James Royal writes for Bankrate.com.
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