Is it worth “tuning up” your 401(K)?

Most financial planners offer to analyze a client’s 401(k) plan and develop an optimized portfolio using available investment options. In most cases, the cost of this service is around $250. Some might wonder “wouldn’t it be better to just invest that $250?” or “can my portfolio be upgraded enough to justify the $250 fee?”

First, do you know the current distribution of your 401(k) between stocks, bonds, and cash? Most people don’t. Study after study indicates that having proper asset allocation is the single most important factor in determining investment success. If you have a portfolio that consists of a stock-to-bond ratio that is too low or high relative to your risk tolerance, you will miss your investment goals or constantly lose sleep when your savings are dwindling faster than you can. solve. Analysis and identification of your risk tolerance should be included in your financial planner’s fee, as should determining the asset allocation of your current portfolio, as well as developing a stock/bond/cash mix that suits your needs. to your needs.

Second, making sure your 401(k) is adequately diversified should also be part of the process. The financial advisor needs to make sure that he is investing not only in large-cap stocks, but also in mid-cap, small-cap, and international stocks. In addition, the planner must ensure that he too has exposure not only to corporate bonds, but also to government and international bonds. Of course, determining the highest-yielding investment option in each asset category and identifying the percentage of your portfolio that should be placed in each part of the diversification table should also be part of the advisor’s duty.

Third, do you know the cost of each investment option within your 401(k)? Again, most people don’t. My associate recently reviewed a 401(k) that put 31% of all assets into a money market account for a profit of 08% and the total fees drawn were over 2.4%. The financial planner should identify the expense ratio of each mutual fund in your 401(k). After all, investing in a fund that produces high returns is worthless if the returns are consumed at exorbitant fees.

Back to the original question: Is this all worth $250? Let’s take a hypothetical client, John, make some assumptions and see if he is ultimately satisfied with his decision to adjust his 401(k). John is 50 years old, has $100,000 invested in his 401(k), and intends to contribute $10,000 per year until he retires at age 65. He believes he will live to age 95 and wants to know how much his 401(k) is going to allow him to spend annually until death. Finally, we will assume 3% inflation and that John currently has a portfolio that will generate an annual return of 8%. With these assumptions, John could withdraw the inflation-adjusted equivalent of $26,654 per year from his 401(k) between ages 65 and 95.

Now, let’s say John pays $250 to fine-tune his 401(k); As a result, he can add 1% to his annualized return, either improving the return on his investments or reducing the cost of his portfolio. A 9% annual return would allow John to withdraw the inflation-adjusted equivalent of $33,087 per year from his savings between the ages of 65 and 95. That’s $6,433 more EVERY YEAR! I think it would be safe to assume that John was happy with his decision to supercharge his 401k.

Another way to look at John’s situation is to ask what rate of return John made on his investment. A $250 investment that generated income of $6,433 over 30 years achieved a rate of return of 2,573%. Do you know of other investments that offer that kind of return?