Why checking your 401(k) balance can derail your retirement planning

One of the basic rules of financial responsibility is staying on top of your accounts. You should know your credit score, how much you have in your emergency fund, and what’s going on with your credit card balances. But with your 401(k) account, a certain amount of ignorance is bliss. CNBC Select spoke with Sarah Newcomb, a behavioral economist for Morningstar, about why checking this retirement account too often can cause harmful consequences.

Why checking your 401(k) can (sometimes) be a bad move

Essentially, when we check our investments during a downturn and see that our portfolio values have sustained some loss, we panic and think we need to take action in order to preserve our money. This often means selling some assets — sometimes at a loss — and reinvesting the money when the market is doing well again. But when we check our investments during an upswing and see an increase in our portfolio values, we might, sometimes falsely, believe that our investments are doing well because we’re good at picking stocks and other assets. “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,” Newcomb explains. “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.”

When should you check your 401(k) balance?

While focusing too much on the ups and downs of your 401(k) can be counterproductive, remaining completely oblivious to your retirement portfolio isn’t something Newcomb recommends. Instead, she advises people to create meaningful benchmarks to help them better track if their 401(k) is performing as expected. “Look at how you’re doing compared to where you need to be right now to reach your goals in the future,” she says. In order to devise your personal set of financial benchmarks, you need to know what financial goals you’re working toward. It can help to work with a financial professional who can help you figure out what the goals and benchmarks look like. Remember that those benchmarks need to be meaningful to you and your goals but they should also be realistic. Here are some general retirement savings goals taken from Fidelity that might be a good place for you to start when coming up with your benchmarks:

• Have the equivalent of your annual salary saved by age 30
• Have three times your income by age 40
• Have six times your income by age 50
• Have eight times your income saved by age 60
• Have ten times your income saved by age 67

There’s also a wealth of other tools on the market, like robo-advisors, that can help measure things like your risk tolerance and time horizon before retirement in order to recommend and rebalance your asset allocation to fit your needs. Wealthfront and Betterment are two popular robo-advisors for this reason. Such a hands-off approach can be instrumental in making sure that you don’t make an investment decision purely out of emotion.

Bottom line

While it’s natural to want to check in on your 401(k) balance or other investment account balances throughout the year, it’s important to make sure you’re being thoughtful about why you’re checking in. It’s recommended that you work with a financial planner to establish financial goals and meaningful benchmarks along the way.