FB

Now's your chance.

Make meaningful improvements to your finances every week.

Now's your chance.

Make meaningful improvements to your finances every week.

401k Deep Dive with Chris Costello from Blooom

chris-costello-blooom

Why is a 401K important and how can you manage it better?

Today we delve deep into all matters 401K.  Chris Costello from Blooom.com takes us to the next level to maximize our 401K accounts.

Unless you are a teacher, fire fighter, police officer or government worker, odds are you will not be receiving a pension after retirement.  The best way to insure a dignified retirement is to take full advantage of a 401K account.

We've failed younger people at making 401K's sensible.

Tweet This

The three biggest mistakes to make when considering a 401K are to not participate at all, to not participate up to the point of employer matching, and to invest in the wrong funds.  If you are twenty five years old, the majority of your 401K should not be invested in bonds, earning nearly zero interest.

If you are researching your 401K at home, what is a red flag?  Any fee over 1% is too high. A good index fund will have a fee well below 1%. But don’t use fees as your only criteria.  Low return options like bonds will generally charge lower fees but if you’re thirty years old, you don’t want the majority of your investments in such a low yield return, no matter how low the fee.

Should you still use a 401K if your employer doesn’t match.  Yes, absolutely.  This is your retirement. Ideally you would receive matching funds but even if that is not the case, contributing to the plan still makes sense.

What if your employer does not offer a 401K program?  Do some research, there are services that offer 401K’s for very small start up costs.  If that is not possible, look into an IRA but you will need a bit of savy to manage an IRA on your own.

A Roth 401K is something that some companies feature in a traditional 401K.  401K contributions will be pre-tax and Roth’s will be post tax.  The advantage is tax diversification of your investments.

A 401K can be cashed out once you reach 59 1/2 (government math!).  If you retire before that age, you can roll that money into a traditional IRA account.  You won’t be penalized but will pay taxes on the amount you withdraw.

What is our takeaway?  Education, education, education.  Listen to this podcast, do some research, ask questions and you can make your retirement accounts work for you.

Show Notes

Blooom: Blooom is a service that will take the guess work out of managing your 401K.

Morningstar: A company that helps you choose the best mutual fund.

Subscribe and have your financial mind blown.

Get all the things that are free and awesome, in your inbox.

It's about time you got your shit together.

  • I recently dumped my 401(K) active management due to high fees.

    I’m still not completely confident in my account management abilities,
    so I moved my account management to Blooom last month as a much more affordable experiment.

    The first thing Blooom did was sell off ALL of my Large Cap Blend fund (as close to an index fun as my plan gets) at a .03% expense ratio… and bought up much more in a Developed International Fund that has a .76% expense ratio. The Large Cap Blend fund has an equal 10-year return (a bit over 7%).

    I don’t think that was very wise! Do you think I should ride it out (I’m 36)? The difference over time in the compounding fees are enormous (I can see this plainly thanks to FeeX).

    • Yikes, that’s disgusting! I’d go it solo with your own picks. Like you said, any gains in performance will be negligible next to the epic losses from fees.

      We did this episode awhile ago and we were working on collaborating but they’ve since been too busy for us. I was excited about what they were trying to do but it’s not something we actively recommend any more. Knowledge from the episode is still solid though.

      • Andrew M

        I have a few “rule of thumbs” I use to help narrow down when I manage my portfolio.
        1. Sort for 0.50% fee and less
        2. Look for Vanguards if they are available to you
        3. Invest ratio: 60% domestic index stock; 20% international index stock; 10% alternatives (example REIT); 10% index bonds

        Now, #3 is definitely different for everybody, but it seems to me you are still at the age where mostly stocks is is good and you can ride out any dip that happens in the market.
        All the systems I’ve seen out there have had similar ratios. You can tailor to your preference of more international, no bonds, more alternatives, whatever you like.

        I hope my thought process is able to help you come up with your own. And remember, people that come up with the best ideas first steal ideas from others! ;-)

    • Andrew M

      I have a few “rule of thumbs” I use to help narrow down when I manage my portfolio.
      1. Sort for 0.50% fee and less
      2. Look for Vanguards if they are available to you
      3. Invest ratio: 60% domestic index stock; 20% international index stock; 10% alternatives (example REIT); 10% index bonds

      Now, #3 is definitely different for everybody, but it seems to me you are still at the age where mostly stocks is is good and you can ride out any dip that happens in the market.
      All the systems I’ve seen out there have had similar ratios. You can tailor to your preference of more international, no bonds, more alternatives, whatever you like.

      I hope my thought process is able to help you come up with your own. And remember, people that come up with the best ideas first steal ideas from others! :-)

      • Multiple Andrews! :)
        I’m going to expand a bit in the LMM community if I may.