Is Your Dollar tree 401(k) on Track?

Managing your Dollar Tree 401(k) plays a critical role in determining the success of your retirement plan. For about one-third of American workers (32%), retirement accounts are expected to be the primary source of retirement income, according to Transamerica Center for Retirement Studies.

In other words, your Dollar Tree 401(k) may be a meaningful part of your portfolio and comprehensive financial plan. And yet, many plan participants are left to their own devices when managing these accounts, adding to the risks and challenges of retirement planning. 

While enrolling in your 401(k) plan is typically an easy process, selecting and managing the investments can be a more nuanced process especially as you approach retirement. 

Below we will cover 4 tips to make sure your 401(k) aligns with your financial and retirement goals.

1. Reassess your risk tolerance

To determine how much risk you should have, consider the following questions:

1. How much risk do you want? 
2. How much risk do you need? 

The first question addresses your risk tolerance, which is your ability and willingness to take on risks. A good way to think of this is how much risk can you take on and still sleep at night. You can answer this by asking yourself hypothetical questions around best- and worst-case scenarios, like “how would I feel if my portfolio lost 30% over the next 6 months?” If you’ve been investing for a while, it may be helpful to look to the past for answers – what did you do in the past, and has anything changed about your financial situation since then? 

Many 401(k) plans will have risk tolerance questionnaires on their plan website. The results typically provide a suggested asset allocation. Consider the three most common types of risk profiles:

• Conservative
• Moderate
• Aggressive

The second question addresses your risk capacity, which is the risk you must take to meet your financial goals. This is basically a math equation that looks at factors such as the income you’ll need during retirement, the number of years until retirement (time horizon), your income potential and savings rate while working, and your current assets.  Your personal circumstances can increase or decrease your risk capacity.

2. Review your contribution rate

Consider the following when reviewing your contribution rate: 

1. Contribute at least the company match – otherwise, you’re leaving money on the table! For example, say your company matches up to 6% of your salary. That means if you contribute 8% of your salary, your company will contribute 6% for a total of 14% of your salary a year. On the other hand, if you contribute 2%, your company will contribute 2% – leaving 4% of your salary on the table every year.
2. Try to max out the 401(k) contribution limit if you’re able – One of the benefits of 401(k) plans is that you can contribute a higher amount than you would be able to if you were investing in an Individual Retirement Account (IRA). For 2022, the maximum contribution is $20,500, or $27,000 if you are age 50 or older. That is compared to the IRA contribution limit of $6,000, or $7,000 if you are age 50 or older. If your income allows it, consider taking advantage of the additional savings potential in a 401(k) plan. 
3. Many financial experts say a good rule of thumb is to contribute 10-15% of your salary each paycheck – This will depend on how much you can afford to put away considering your other financial obligations. You should review annually to see what would happen if you increased your contributions by 1%, 2%, or 3%, particularly if you are behind in saving for retirement. 

3. Choose Your Investments

When it comes to choosing your investments in your 401(k) – many participants adopt a “set it and forget it” mindset. A set it and forget it approach is beneficial for investors who don’t feel comfortable managing their money. This approach also discourages participants from trying to time the markets (a difficult feat even for professional investors), chase returns, or make irrational decisions based on market conditions. Conversely, some participants prefer to manage their money themselves – taking a “do it yourself” approach. 

Let’s look at the highlights for two managed options within 401(k) plans, target date and target risk funds, as well as the do-it-yourself approach. 

Target Date Funds

Target date funds have become increasingly popular in 401(k) plans and are often selected as the default option. They provide a diversified allocation that is managed by the fund company, not the participant, and rebalances each year to get more conservative as you head towards retirement. These can be a good option for those who want a simplified approach to investing in their 401(k) and aren’t comfortable managing the assets themselves. 

The primary challenge is that target date funds only consider one factor of your overall financial goals and situation – when you are going to retire. They don’t take into consideration your earnings, risk tolerance, goals, and objectives. The following examples illustrate potential issues selecting a target date fund may cause.  

• Vanguard Target Retirement 2050 fund has an asset allocation of 90% equities. During the great financial crisis in 2007-2009, the fund lost 51.7% of its value from peak to bottom in the value of the fund. Not everyone who plans to retire in 2050 can psychologically handle a 52% drop in their retirement account without selling low, in turn dramatically hurting their long-term investment results. 

• Suppose Jane, a 401(k) participant, plans to retire in 2040. She reviews the 2040 target date fund’s allocation but thinks the 80% stocks / 20% bonds allocation in the fund is too aggressive for her. Instead, she likes the allocation in the Vanguard Target Retirement 2030 fund, which currently invests approximately 65% in stocks and 35% in bonds. However, this fund will likely shift its asset allocation too soon for Jane – moving more conservative, while she is still more than 10 years away from retirement. 

• John, another 401(k) participant, takes the opposite approach to Jane. He plans to retire in 2030 but decides the fund’s allocation is too conservative for him, so he selects the 2045 target date fund. If he chooses to stay in the fund, he may find that the allocation will not shift when he needs a less aggressive allocation at retirement. 

Further, target date funds aren’t all created equal – expenses and risk allocations can be very different among funds. Peter Lynch once said, “Know what you own, and know why you own it.” Look at the expense ratio and understand the allocation and investment strategy prior to investing. Once you’ve invested, make sure to re-evaluate the fund and allocation to ensure it is still a suitable investment for you, given your goals and circumstances. 

Target Risk Funds

Similar to target date funds, target risk funds are professionally managed, well diversified, and are rebalanced annually by the fund manager. Target risk funds are managed to maintain a certain risk profile, such as conservative, moderate (balanced), and aggressive/growth. You choose a fund based on the amount of risk you prefer. Consider whether you have prioritized your long-term investment goals when selecting a target risk fund. Selecting a conservative fund that is in line with your risk tolerance may cause your retirement investments to fall short. In this case, you would want to consider increasing your risk level to meet your investment goals. On the other hand, if you are retired but still select the aggressive portfolio, you may be taking on excessive risk. 

Do it Yourself

If you feel comfortable managing your assets yourself, 401(k) plans often offer a menu of passively managed index funds and actively managed funds. These funds have been evaluated and chosen by the plan’s fiduciary, meeting an initial due diligence requirement. The first step in selecting or reviewing your assets is to determine whether you will use low-cost index funds or actively managed funds. The choice depends on your personal investing style. One thing to be aware of is active funds typically have higher fees than passively managed index funds. They may require patience as there may be times when the fund’s performance deviates from the index. 

Next, you will want to consider the asset classes you want to invest in, the funds available, and the expenses for each fund. Once you have your investment selections and allocations finalized, take a step back and look at your asset allocation and the risk of your entire portfolio. Like with target risk funds, you’ll want to be sure you aren’t taking too little or too much risk to meet your retirement goals. We suggest you document your investment plan, which should serve as the frame of reference when markets get volatile and can help reduce the temptation to make changes. Finally, we recommend you review your allocations at least annually for any rebalancing needs or fund changes. Funds can drift meaningfully over time, meaning your portfolio may shift to a more aggressive risk level than you intended.  

4. Consider Professional Management

A financial advisor can provide recommendations and ongoing management of your retirement plan. This may be particularly useful if you have assets outside of your retirement plan, as you can reap the benefits of comprehensive portfolio management. An advisor can recommend investment strategies that optimize your investment allocation and potentially reduce tax burdens. 

Studies have shown that professionally managed accounts outperform managed accounts by 3% or more, net of fees. For a 45-year-old participant, this could translate to 75% more wealth at age 65.¹

It is important to reassess your retirement plan progress and investment allocations at least annually. If you’re looking for a trusted CERTIFIED FINANCIAL PLANNER™ professional whose fiduciary duty is to you and your wealth only, call Tull Financial Group today on 757.436.1122 to see how we can help you plan for your dream retirement – no matter your age!

Disclosures:

¹ Vanguard. “Putting a Value on Your Value: Quantifying Vanguard Advisor’s Alpha.” February 2019. Russell Investments. “2021 Value of an Advisor Study.” April 2021. Hypothetical performance calculations are shown for illustrative purposes only.

The information contained in this document is based on sources believed to be reliable. However, accuracy and completeness cannot be guaranteed. 

Past performance does not guarantee future results. As with any investment strategy, there is potential for profit as well as the possibility of loss. Tull Financial Group does not guarantee any minimum level of investment performance or the success of any portfolio or investment strategy. All investments involve risk and investment recommendations will not always be profitable. 

This document does not constitute a complete description of our investment services and is for informational purposes only. It is in no way a solicitation or an offer to sell securities or investment advisory services. All investments involve risk, including foreign currency exchange rates, political risks, market risks, different methods of accounting and financial reporting, and foreign taxes. Your use of these materials, including the tullfinancial.com website, is your acknowledgment that you have read and understood the full disclaimer below.

The discussion is general in nature, and therefore not intended to recommend or endorse any asset class, security, or technical aspect of any security for the purpose of allowing a reader to use the approach on their own. Diversification does not ensure a profit or protect against a loss. There is no guarantee that any particular asset allocation or a mix of funds will meet your investment objectives or provide you with a given level of income.