Retirement savings can be a bit tricky with all of the different types of accounts. A 403(b) plan is a defined contribution that allows participants to shelter money on a tax-deferred basis. Some 403(b) plans allow for Roth contributions also. The annual contribution limit for a 403(b) is $19,500 for 2020 and 2021. Many 403(b) account holders end up making mistakes that can end up providing low returns. To learn more on how to avoid these mistakes with your 403(b) plan, keep reading!
Mistake #1: Being Too Risk Averse
403(b) plans over multiple investment options and companies sometimes get overwhelming. Some people are afraid of making the wrong choice, so they put their contributions into a money market account or another type of low growth investment instead of investing in investments geared towards higher growth. With these low growth investments, your money can end up decreasing in value over time, due to it not growing as fast as the usual inflation rate. It is worth the little amount of time it takes to assess the level of risk you are comfortable with and then invest accordingly. A financial advisor can also help with this. It could greatly increase your overall retirement savings and help you reach your goal quicker.
Mistake #2: Owning Too Much of Your Company’s Stock
If your company allows you to purchase stock in your retirement plan, it may be tempting to invest a decent portion of your contributions in their stock. Refrain from investing most of your retirement plan in company stock since this could keep you from being properly diversified. Employees of companies that were involved in major scandals, such as Tyco, lost their jobs and their retirement savings because of the company’s actions. Reduce this risk by having a diversified retirement portfolio and not putting all your trust into your employer’s stock.
Mistake #3: Equal Allocation Across all Investment Options
Many people invest an equal amount of money into every available investment option to create a diverse portfolio. Many investments hold the same underlying companies; thus it could actually hinder diversification.
Mistake #4: Not taking Advantage of Small-Cap and International Investments
When you start your 403(b) plan, you should be provided with the performance of every investment option within the plan. Typically, investors stay away from any investments that have not performed well in the recent past, which sometimes includes small-cap and international funds. This does not mean that they will not be viable growth investment options in the future. Utilizing small cap and international investments can improve your portfolio’s diversification and overall returns.
A financial professional can make your retirement planning much easier. LifeBridge Financial Group canl help you avoid making these mistakes with your 403(b).
Sources:
https://www.irs.gov/retirement-plans/403b-plan-fix-it-guide
https://horizonfs.com/four-common-401k-403b-mistakes-avoid/