Many people use the old “Set-it And Forget-it” strategy when it comes to their workplace retirement plan. They fill out a quick questionnaire that tells them which funds to put their money and so they do it. Leaving it that way for years, even decades.
Then along comes a major market shift like we have had recently, and they are kicking themselves for not paying closer attention. The reality is, you need a strategy for your 401(k) or other work plan just as you would with a financial advisor, especially during turbulent times like these.
Right now, you have a great opportunity to implement a simple strategy that can pay off in years to come. I am actually going to teach you how to buy low and sell high in your retirement plan.
Investors can start by thinking about their 401(k) plans in two very different parts:
- Current contributions: new money that is put into the account during each pay period
- Existing balance: the money that has already been allocated to an existing fund
From a financial perspective, there is a drastic difference. Let’s say you are putting $12,000 a year into your 401(k) and you get paid twice a month. Therefore, your current contributions would equate to roughly $500 per pay period.
On the other hand, your existing balance that you have saved so far and have in the plan could be anywhere from $250,000 – $500,000 (20 to 40 times as much as you are saving annually).
The good news is, we are not going to mess with the big number right now, just the current contributions or $500 going into your account each pay period.
To help you understand how this strategy can work and benefit you, I want you to understand two concepts. Asset Classes and Dollar Cost Averaging (DCA). If you look at your 401(k) investment options, you will notice that there are different categories of investments. For example, Large Cap, Mid Cap, Small Cap, International, Emerging Markets, and Fixed Income or Bonds.
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