How Often Should You Check Your Retirement Account?
You might think that checking your retirement account, like checking your credit score, should be done frequently and regularly. However, you might actually be doing more harm than good if you find yourself checking your 401(k) on a regular basis, and making quick decisions based on your check-ins. This is because the ups downs of the market can have negative psychological effects on your financial planning. Depending on current market and economic fluctuations, people tend to make snap judgments — and financial decisions — concerning the status of their investments. Yet, these snap decisions can oftentimes hurt long-term financial goals.
Speaking to CNBC Select, Sarah Newcomb, a behavioral economist for Morningstar, explained, "Overconfidence is a huge problem for a lot of us because we love to take credit when the market is up and blame external forces when markets are down." Even though market fluctuations are to be expected with any kind of investment, it can still be difficult for people to accept the up-and-down nature of their money, especially when it comes to something as important as retirement. However, in a rush to try and take control of one's finances — especially in instances of economic change — people tend to generally make things worse. While you should still make sure to keep an eye on any and all of your financial accounts, you might want to avoid regular check-ins of your retirement account(s) if you find yourself easily swayed by changing market conditions.
Checking your retirement account(s)
In her interview with CNBC Select, Morningstar's Sarah Newcomb also explained why peeking at your retirement accounts during an upswing in the market can be so psychologically draining: "The danger of checking during peak moments is that cognitively you anchor on that really high number as if you have that money in the bank. But if the market is down tomorrow, you will feel like you've lost money." Part of this disappointment also comes from the fact that during upswings, we tend to falsely believe in our own investment talent or prowess, which is exactly what can make it feel so much worse when/if the market takes a downward turn.
Another potential issue with an upswing check of your retirement account is that you might decide you no longer need to check your accounts as frequently, or you might falsely believe you should keep your investments as is long term. Both of these can ignore potential market changes and lead to financial loss due to a lack of investment adjustments. On the flip side, checking in and seeing a drop in your investment account totals due to market downturns can cause a sense of panic. Oftentimes, this can lead to hurriedly selling assets (even at a loss), or deciding to reinvest again only after the market is back up.
Remember that, while frequent retirement account checks can lead to negative psychologically- driven behaviors, that doesn't mean you shouldn't keep regular tabs on your retirement accounts. The important thing to keep in mind is mitigating any knee-jerk reactions you might have to natural fluctuations in both the market and the status of your retirement account totals.
Reaching your financial goals
As tempting as it is to frequently check on your retirement accounts, the most important thing to remember is your long-term financial goals. While everyone has different risk tolerance, and your specific investments hopefully reflect what you're comfortable with, there naturally are bound to be fluctuations with any retirement account. The main thing to keep in mind is reaching the financial milestones you've set out for yourself. If you're not entirely sure how much you should be saving, Fidelity has a relatively simple timeline guide to retirement savings that starts with saving at least your annual salary by age 30. After that, the savings amounts multiply, meaning you should aim to save three times your salary by age 40, six times by 50, eight times by 60, and 10 times by 67.
If these numbers seem far away from your reality, take them with a grain of salt. It's important to realize that Fidelity's numbers make several significant assumptions. Namely that a person is able to start saving 15% of their income by age 25, that they receive an employer match on their 401(k), and that they invest more than half of their entire savings in stocks. These factors alone disqualify a wide swath of people, so use this (and any other) timeline as a general savings goal and find the numbers that work best for your lifestyle, income, and financial goals. Remember: Determine what kind of lifestyle you hope for in retirement, and work backward to make it a reality.