Most healthcare workers will agree that contributing to your nurse retirement plan is the smart thing to do (who doesn’t love a bonus from the hospital).
Additionally, many financial radio personalities will tell you to max out your 401k and forget it, touting it as the crystal clear path to retirement. I tell the healthcare 401k participants I work with the same thing, but I don’t leave it at that.
The problem is that too many of these influencers and those tasked with advising plan participants completely ignore the most important part.
How the money is invested and if it makes sense for the long term best interest of the employee.
This is an issue when we consider that two thirds of Americans don’t understand how the plans work let alone the investments within. And with busy schedules and sick patients how could you be expected to figure it all out?
A little guidance can make a huge difference. That is why I’ve prepared the top three mistakes that can literally be a million dollar difference if avoided.
Mistake One: Target Date Funds
You may have heard of the most common type of strategy inside a nurse retirement plan, target date funds. Over half of all 401k plans offer these as options.
To summarize, they set you up in a way where you are taking more risk the younger you are, toning the risk back as you get closer to retirement.
An example would be a 2035 target date fund, folks invested in this would be planning on retiring close to 2035. Each year as they move closer to this date, the portfolio is going to adjust to what the managers determine is a more conservative portfolio.
The main idea is you shouldn’t be taking as much risk when you are getting closer to retirement.
Sounds pretty good…at first.
But these plans make a lot of assumptions, one being that the participant is on track to retire the way they desire. Yet many begin nursing as a second career and haven’t been able to save as much in the past as they are now.
They also sometimes may be a bit too conservative for the risk tolerance of a healthcare worker who is still early on in his or her working years.
Target Date Funds make sense for some but at all, and should not always be a default option.
Potential Mistake Two: Fixed Accounts
Another common occurrence in a 401k is for the participant to tell a plan advisor that they are conservative and don’t want to lose any money.
The end result is they get thrown in a fixed income strategy guaranteeing 1.5%. While some people would be happy with 1.5%, it is also important to understand that figure is just a fraction of what the S&P 500 has averaged for decades.
A return of just 3% instead of 1.5% can make a huge difference when we are talking about someone making as much as a nurse or other healthcare professional.
Rarely is there a conversation with you about the impact opting for a lower rate of return will have on your long term nurse retirement goals.
My mother is a perfect example of someone who worked hard her whole life, but wasn’t given the guidance to help her truly understand the weight of these decisions. Had she considered a moderate risk portfolio as opposed to a conservative fixed account, her retirement fund would more than double what it is today.
Nobody explained the pros and cons so a quick uneducated decision was made.
If you do decide that a low fixed rate of return is best suited for your risk tolerance and goals, be sure to fully understand the risks and potential benefits of any alternative options.
Potential Mistake Three: Blind Diversification
Lastly, something you’ll see often is a participant picking a few different strategies and hoping for the best. Investors diversify to attempt to maximize returns for the given level of risk they are willing to take, but this must be done correctly or it can have a negative impact on your nurse retirement plan.
After all, most participants are not actively keeping up on the performance and management of these funds.
Another thing to consider is many investment strategies in a 401k are designed to cater to as many people as possible. What’s best for healthcare retirement in general may not always be best for where you are at on your retirement journey.
Don’t Leave it to Chance…It Can Mean A Less Than Desirable Outcome
I’m sure you are starting to pick up what I’m laying down. I’m here to tell you that you should not fall into the trap so many before you have fallen victim too.
The trap of not understanding the investments within your retirement plan.
Sure, a target date fund might make perfect sense for you. Maybe picking three funds with a blindfold on will make you a millionaire, I don’t know.
What I do know is that our team can offer you the solution of KNOWING how you’re invested and what to expect. This will help you take control of your future.
If you would like further information on planning for or re-evaluating your retirement, or simply want to chat to a financial expert specializing in nurse retirement, give us a call at our Traverse City office at 231-421-7391. If you’d rather look into it on your own for now, feel free to check out our Ultimate Retirement Guide.