As more companies are eliminating their pension plans and converting to a 401(k) or other qualified plans it is forcing more employees to manage their own retirement plans.  It has been our experience that managing a 401(k) is not that difficult if many common mistakes are avoided. At MaxOut Savings Advisors LLC we have found that savings is the biggest contributor and determinant of a successful retirement plan. The next most important determinant is how you manage the assets in your plan.  Remember a successful retirement now requires you to take charge of your retirement plan.  Successful management of your 401(k) requires a plan and avoiding these common mistakes. 

1. Failure to Participate.  In some plans fewer than 65% of the employees contribute anything to their 401(k) plan.  This is self explanatory; you will find it very difficult to retire successfully if you do not participate in your company’s 401(k) plan.  This is especially true now that many companies have eliminated pension plans and have replaced it with a 401(k) plan.  Some common reasons for not participating are not having enough money, saving for a house, or fear of the stock market.  There is never a good reason to not participate in your company plan.  If you cannot hit our goal of 10% plus a company match, then start at 5% and work your way up.

2. Not Saving Enough for Retirement Your savings rate is the single biggest determinant of a successful retirement plan.  What is your savings rate for your company plan?  Are you saving enough for retirement?  If you are saving under 10% of your income you should look at your retirement needs and run a calculation to see if there is a need to increase your savings rate.  Remember, even if one cannot get to the target savings level needed, every little bit helps.  If need be, increase your savings 1% at a time until you reach your target savings level.  If you are over 45 years old and are behind in savings you should look to increase your savings rate to 15%.   We see many people saving 20% of there income to catch up as they get close to retirement.

3. Not Collecting Free Money.  In most 401(k) plans the company will match your contribution up to a certain percentage.  The match will typically be 50%-100% match up to a set point.  This is like getting a bonus 50%-100% return on your money; take advantage of the offer and collect all the “free money” offered.  The one caveat is that in many plans there is a vesting clause that require a certain length of service to the company.  Remember at a minimum your savings rate should be at a level to collect 100% of the company match.

4. Failure to Asset Allocate.   The Tech Bubble should have taught most people this lesson.  Proper asset allocation is the hallmark of a good 401(k) plan.  We asset allocate to grow the portfolio and at the same time reduce risk.  Remember the football teams that go to the Super Bowl are often the ones with a good defense.  Defense wins championships and reduces risk in investment portfolios.  Your plan should have the proper mix of stocks, bonds, cash and international assets prudent for your expected retirement time frame.  At MaxOut Savings Advisors LLC we generally start with a 60% stock and 40% bond weight and adjust the asset mix from there.  This mixture of assets reduces the risk that any one asset decline will wipe out your investment portfolio.

5. Overweight Company Stock or Industry.  The employees of Bear Stearns owned 30% of the company stock; after the firm collapsed within one week many of them were wiped out.  The lesson learned from Enron was it is dangerous to have too much company stock in your 401(k) plan.  We would recommend a maximum of 20% of your portfolio in the company stock.  This is higher than some recommend and takes into account the fact that some people want to have a vested interest in the growth of their firm. In Houston, being an energy city it is easy to overweight the oil industry stocks.  Still this should be avoided just look what happened in the technology industry.  The 401(k) plan should be rebalanced quarterly to prevent over allocation of your firm’s stock or industry.

6. Annuity in your 401(k).   At MaxOut Savings Advisors, LLC we have more people come to us with annuities that they are unhappy with and cannot get out of than any other concern. Typically annuities are sold by the broker to collect a commission and people do not realize that they cannot get out of the annuity for up to 10 years.  In some cases the penalty to get out of the annuity early is 10%. As a policy, Fidelity Investments discourages investing in annuities in IRAs and most qualified plans.  Every situation is different; generally however all you are doing with an annuity in an IRA or 401-k is increasing your fees.  Fees for an annuity can run over 3-4% vs .75-1.5% for mutual funds, stocks and bonds.   It is almost never a good idea to put an annuity in a qualified plan.

7. Using 401(k) Plan as a Bank.  Using your 401(k) as a bank is an easy trap to fall into. It is rarely a good idea to borrow or get a loan from your 401(k).  Your 401 (k) is your last line of defense for retirement. For most savers our experience has been that finances are generally tight until they look up at retirement and have over $1 million in their company plan.  So do not touch your 401(k) plan until retirement and you will be grateful for the sacrifices you make now!

8. Forgetting to Rollover.  Often times changing jobs is stressful and hectic; we tend to not worry about the old 401(k) plan.  When you change jobs there are 5 things you can do with your company plan:
   • A. Transfer Plan to new company plan.
   • B. IRA Rollover and consolidate with your IRA.
   • C. Annuitization
   • D. Cash out or take a check
   • E. Leave it in the old plan

Once you are settled in the new firm move the old plan over to your new firm or roll it over into an IRA.  An IRA Rollover is a good way to consolidate your old 401(k) and company plans.  Once the assets are consolidated in an IRA Rollover they are much easier to manage.  An IRA Rollover can be set up at a bank, brokerage firm or with an investment advisor.

9. Cashing Out at a Job Change.  The quickest way to wreck your savings program is to cash out of your old 401(k) when you change jobs.  In addition to ruining your savings you will be taxed at ordinary income plus a 10% penalty.

10. Timing the Market.  It is rarely a good idea to time the stock market and very difficult to do successfully long term.  Stick to asset allocation and picking good quality mutual funds.  If you are concerned about the markets raise cash in percentages, this way you are not making all in or all out decisions that could “freeze” up your decision making. 

11. Too Aggressive or Too Conservative.  Over-weighting an investment could upset your investment portfolio if it were to go bad.  A lesson that should be learned is that, no matter how sure the investment appears, things can go wrong.   At the same time all cash does little good long-term for your portfolio.  Remember to work to achieve a balance with your investments.  Make sure that any one decision if it goes wrong does not hurt your overall savings plan.

12. Investing in the “Latest Fad” or Hot Mutual Fund.  Stay away from the hottest mutual funds or stocks.  Many investors get caught up in the latest investment fads.  Remember the Tech Bubble, Internet Bubble, or the Junk Bond craze?  These all ended with losses for investors.  After one or two years it is very difficult to repeat hot sector performance.

13. Lacking an Investment Plan.  Most 401(k) investors have no 401(k) investment plan. Draw up an investment plan detailing percentage asset allocation, when to rebalance (quarterly) and maximum weightings in an asset class.   This can be as simple as something on the back of an envelope or as complex as you want to make it.  For example: 60% socks/ 40% bonds.

14. Have a Defensive Plan.  In recent MaxOut Savings Reports we talked about the Perfect Financial Storm and the need to build a castle for your investments.  As an example, set a stop loss at a certain price for an investment if it goes bad. A stop loss is a set order or mental stop you use to sell if an investment goes against you to prevent further losses.  You can set your stop losses at 10-20% where ever you feel comfortable with.  It could be as simple as raising cash levels to 20% if you become worried about your plan investments.  The key here is to have a plan of some type and not freeze up like many did during the tech bubble collapse.

15. Goal 10% plus match.  The biggest mistake in a 401(k) plan is not setting a high enough savings goal.  For most people your savings should be 10% plus the company match. 

Always remember the key to a successful retirement plan: Save Aggressively and Invest Conservatively!

If you are having problems or concerns it is a good idea to get some help.  A good place to start is with your company contact for the 401(k) program.  If they cannot help they can point you in the right direction.  At MaxOut Savings Advisors we work every day managing investors 401(k) and IRA Rollover accounts. If you need help or would like MaxOut Savings Advisors to manage your accounts email us at ted@maxoutsavings.com or call us at 713-627-0400.

Need Help Managing Your Retirement Investments?

In these volatile times, investing your retirement funds can be difficult and time consuming.  Why not hire the MaxOut Savings Advisors team to manage your money?  If you would like MaxOut Savings Advisors to manage your retirement investments using our value methodology, I would be happy to meet with you.  To schedule an appointment please give us a call at 713-627-0400 or email me at ted@maxoutsavings.com.

Remember Save Aggressively and Invest Conservatively!

Did you know that the MaxOut Savings Advisors money managers can now manage your IRA Rollover at Fidelity Investments?  At MaxOut Savings Advisors we use Fidelity Investments to handle our investments for our clients.  We invest in stocks, bonds and Fidelity and non-Fidelity no-load mutual funds. If you would like to sit down with us at MaxOut Savings Advisors and discuss your IRA Rollover or 401-k or just review your retirement plan give us a call at 713-627-0400 or email me at ted@maxoutsavings.com

Ted K Geoca

President

MaxOut Savings Advisors, LLC

Houston, Texas

ted@maxoutsavings.com                                 713-627-0400

Remember to catch:

The MaxOut Savings Show with Ted Geoca Houston’s leading retirement specialist on Saturday at 11:00am on KNTH 1070AM!

The MaxOut Savings Show and Report does not give out financial advice.  Any recommendation or idea may not be suitable for all investors.  Moreover, although information contained herein is believed to be reliable, its accuracy cannot be guaranteed.  MaxOut Savings Advisors, LLC may or may not have positions mentioned herein. MaxOut Savings Advisors LLC is a Registered Investment Advisor with the SEC. You should always make investment decisions based on your own financial situation.

To sign up a friend for our free MaxOut Savings Report or to remove your name off the MaxOut Savings Report list, email ted@maxoutsavings.com