Saving for retirement requires answering big questions, but it’s important not to overlook seemingly minor questions that could impact your retirement goals, such as whether it’s time to rebalance your 401(k). Regularly rebalancing your 401(k) can help you maintain your desired risk level and protect against financial losses. It’s always a good idea to consult with a financial advisor or tax professional to determine what’s best for you.
Starting your 401(k) plan at the beginning of the year can be beneficial for a few reasons:
- Time in the market: By starting your contributions at the beginning of the year, you give your investments more time to grow. Over time, compounding returns can add up significantly, so the earlier you start contributing, the better.
- Maximize contributions: If you aim to contribute the maximum amount allowed by the IRS each year (in 2023, the contribution limit for a 401(k) is $20,500), starting at the beginning of the year gives you the full year to make contributions, rather than trying to catch up later in the year.
- Avoid missing out on employer matching: Some employers offer a matching contribution to your 401(k) plan, but only if you contribute a certain amount each paycheck. By starting early, you can ensure that you are contributing enough to take full advantage of any employer matching.
Why is rebalancing your portfolio important?
Rebalancing your portfolio is important because portfolios will naturally get out of balance due to the fluctuation of underlying investments in the market, which can reflect in your portfolio. If you don’t rebalance your portfolio periodically, it may drift away from your desired asset allocation, and your investments may become riskier or more conservative than you intended. Rebalancing helps you restore your portfolio to your desired mix of stocks, bonds, and other assets, which can help you manage risk and stay on track with your investment goals. In short, rebalancing ensures that your portfolio remains aligned with your investment objectives and risk tolerance.
Should I ever change my portfolio allocation?
There are two types of variables that can affect your portfolio allocation: market variables and investor variables. Market variables, such as economic downturns or booms, are beyond your control and should already be factored into your portfolio allocation based on historical market performance. Avoid making sudden changes to your portfolio allocation based on short-term market fluctuations.
Investor variables, such as changes in your personal life or time horizon, may require a reevaluation of your portfolio allocation. For example, if you are getting closer to retirement, you may want to adjust your portfolio allocation to reflect a more conservative investment strategy.
To make sure your portfolio allocation matches your investment needs and risk tolerance, you can retake a suitability assessment every year. This can help ensure you are invested in a portfolio that is aligned with your goals and needs.