Ten Tips To A Stronger 401k
It is hard for many of us to keep fit physically, but it is not that hard to ensure you have a strong 401k. Use these tips to keep your 401k fit and ready for you when you need it.
1. Start saving now: According to the American Savings Education Council, one-quarter of those with access to 401k plans do not participate. These employee are endangering their retirement years, don't be one of them by putting off participating in your employer sponsored 401k, even if you think you can't afford to. Time is your best guarantee that you will make your retirement goals, so the sooner you start contributing to a 401k the better off you are going to be in retirement. Even just one or two percent will make a big difference.
2. Contribute as much as you can: You can contribute up to $17,000 in 2012, although some plans may limit this amount. If you can afford to, put in the maximum, but whatever you do, contribute as much as you can. It may seem obvious, but the more you contribute, the more you are likely to have at retirement.
3. Make catch-up contributions: 2001's pension reforms provided that 401k plans could allow people who are age 50 or older save more by taking advantage of a "catch-up" provision. If you are age 50 or older, and your plan allows them, you should make these additional pre-tax contributions to your plan - up to $5,500 by 2011.
4. Get the Match: Many employers match your contributions. This is free money that you can't afford to pass up so be sure to contribute at a level that qualifies for a full match. You should also consider how your employer provides the matched contribution (Does it mirror your investment choices? Is it paid in company stock?) as part your asset allocation strategy.
5. Diversify your portfolio: A well diversified portfolio is your best assurance that you are going to have a nest egg at retirement. Don't be too conservative, but don't become greedy and take unnecessary risk. Spread your assets among funds of different asset classes and investment styles. Watch out for an over concentration in your own company's stock -- keep company stock to 10% or less of your own contributions.
6. Invest for the Long-term: Once you set your allocation, be patient. Discipline yourself to maintain your allocation through down markets as well as up markets. Check and adjust annually based upon your stage in life, economic circumstances, employment status, etc.
7. Invest for Growth: Unless you are within five years or so of retirement, equity mutual funds (stocks) need to be an important part of your allocation. Don't worry about short-term ups and downs in the stock market. Over time, stocks have usually outperformed all other types of investments while staying ahead of inflation. Make equity mutual funds the core of a long-term investing strategy.
8. Review Annually: Take the time once a year to review your life circumstances and long-term goals. Based upon the results of your review, adjust your investment allocation. Even if nothing has changed, you may need to re-balance your portfolio to bring it back into line with your allocation objectives.
9. Don't tap your 401k before retirement: By taking money out of your 401k account, you reduce the benefit of tax-free compounding that is key to building up a substantial retirement nest egg and may force you to work longer. Therefore, avoid loans and hardship withdrawals, even to pay off high interest credit cards. Experts recommend trying other alternatives first, including lifestyle changes to reduce your spending.
10. Educate yourself: You are the only person who has your own vested interest fully at heart, so it is up to you to ensure you know what your plan is all about and how to take full advantage of it. The only way to do this is to educate yourself. Go to all educational opportunities that your employer offers. Get a copy of the 401k plans Summary Plan Description and read it. It contains lots of good information on how your plan works, what options are available, who the trustees are, and other important information. Surf the web and find a couple of good sites on 401k plans like www.401khelpcenter.com. Understand your investment options. Ask questions.
This is for educational purposes only. The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.