Making the Most of 401K Plans
by Diane Halloway
401k Plans Explained
Retirement and Your 401k
Getting the Most Out of Your 401k
The greatest source of wealth for many retirees will be there 401K plan. Participating in this benefit offered by many companies means you're taking a big step toward a comfortable retirement. The size of this nest egg will depend on how much you put into your accounts and how they are invested. And remember, the company match is "free" money. The following points will help you get the most out of your plan:
- You must participate. This is an opportunity you cannot afford to miss. Retirement can last 25 - 30 years. You need a good nest egg to make that wonderful time of life comfortable. Contributing even a small amount each month can add up to a sizable nest egg over time through the power of time and compounding.
- Understand you investment choices and study your options carefully. Mutual funds are the most common choices. Be sure you are investing in the right asset class for your risk tolerance, age and time horizon. Investing too conservatively for a younger person is a common mistake. There are many information sources available to educate yourself on the types of funds you should be choosing for your particular situation. Unfortunately, the plan doesn't usually give you that information. You have to do your own research. Check your public library for fund evaluation sources like Morningstar or Value Line. Also available on the web.
- Diversifying your investments means spreading your money among several different investment options. This helps your portfolio get the most return for the least amount of risk. If one of your investments is doing poorly, chances are your other investments may be doing well.
- Don't try to time the market. Even the professional money managers find this difficult to do. Instead, invest for the long run, regardless of what the market is doing. The value of some investments, particularly stocks and bonds, will fluctuate in the short term. Over the long term, however, they'll usually gain in value.
- Never borrow from your 401K. You'll have less money working for you. If you absolutely must borrow ( I find this is hardly ever the case) pay off the loan as quickly as possible.
- Don't spend you retirement money early. There are severe penalties for drawing out of your 401K early. You'll pay income taxes on any tax-deferred money you withdraw in addition to a 10% penalty if you're under age 59 1/2.
Keep in mind that even if you do not work for a company that offers a 401K plan there are options for the self employed as well.
Diane Halloway is a CPA who is also a Certified Financial Planner (CFP) and has been accredited by the AICPA (American Institute of Certified Public Accountants) as a Personal Financial Specialist (PFS), the only Financial Planning designation recognized by the AICPA. She also specializes in Long Term Care Insurance and has a tax/financial planning/LTC insurance practice in Houston, Texas. She can be reached at 281-486-7358 or DHalloway@aol.com
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