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401(k) vs. IRA Performance

“Why does it seem like my 401(k) often performs better than my IRA?” This is a question that I’ve heard many times from prospective clients.

The chief answer is because your 401(k) has automatic contributions going into it at each payroll period, typically from both you and your employer. Given these contributions are set amounts being contributed to the account at set intervals, even during downturns you are purchasing additional funds. This allows you to pay less for the same funds than you would during market highs, effectively buying these funds at a “discount.” These consistent contributions can help offset any losses in the market, as you are essentially averaging out the cost of the funds you purchase over the lifetime of the 401(k).

This can be particularly helpful in years like 2022, where the market declined from start to finish. (However, during the year there were periods where the market made gains.) If your IRA only held the same securities all year long, it would be easy to calculate the loss on the year. On the flip side, your 401(k) would have given you opportunities to make gains on certain contributions due to the nature of the contribution intervals. I’m not suggesting it would have saved your 401(k) from a negative return in 2022, but it would give you a better shot at mitigating the downside than simply buying and holding your IRA in perpetuity.

This is one of the many reasons we rarely have our clients who are preparing for retirement, or are retired, keep all their retirement funds in buy-and-hold portfolios. Now, more than ever, they need their portfolios managed in a way that allows their risk to be proactively managed on a regular basis, not according to an arbitrary “re-balancing schedule.” If this piques your interest and you’d like to learn more about how we assist our clients, or you know someone that we might be able to help, drop us a line and let’s find a way we can help you!

Categories: The Market

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