Does your company's 401(k) plan makes your eyes glaze over because it's full of unfamiliar words such as aggressive growth, bond, gold, emerging growth, international, value, and money market funds? Don't ignore it -- 401(k)s aren't as complex as they may appear. Here are some tips:
- Begin participating in your company's plan as soon as possible, contributing as much as you can. It not only builds your nest egg but also reduces your taxable income.
- Keep emergency money separate. Invest only what you don't expect to need for at least five years. (Note: There's a penalty on withdrawals before age 59 1/2.)
- If your employer matches your contributions to any degree, take full advantage of the available matching -- it's free money.
- Stocks might be scary, but over the long run they perform best, by far. Unfortunately, more than two-thirds of 401(k) money is in low-yielding bond or money market funds, where it grows very slowly.
- Your best stock-fund bet is probably a stock market index fund (such as one tracking the S&P 500 or the "total market"), which usually outperforms most other mutual funds and has lower annual fees, to boot. If your 401(k) plan doesn't include such a fund as an option, urge your payroll professional to have one added. Every 401(k) plan in the nation should include a stock market index fund.
- Leave your money in the plan for as long as possible. This delays the ultimate tax bite and permits maximum growth. Don't borrow from your account unless it's an emergency.
Taking advantage of your 401(k) means you shouldn't end up having to rely on government programs like Social Security.
For much more guidance on retirement topics, do yourself a favor and take advantage of a free trial of our Rule Your Retirement newsletter. It's issued each month, is readable in a single sitting, and contains lots of valuable tips, as well as inspiration and motivation. (You've got little to lose and a lot to gain by trying it for free.)
The lead writer for the newsletter is our Robert Brokamp. Check out his enjoyable style in these articles:
- I Eat My Children's Scraps
- 6 Retirement Resolutions
- 7 Social Security Myths
- Stocks for the Really Long Term
- Annuities: Who Needs Them?
And by the way, if thinking about investing makes your head hurt and you'd like an actual person (a financial pro, no less) to talk to about your financial situation, look into our TMF Money Advisor. It's a valuable service we're offering, featuring customized independent advice from a variety of objective financial experts. You need to make sure you're saving enough and well enough to meet all your needs -- if you need some help doing that, look into this offering. (To take savings matters into your own hands, visit our Savings Center.)