thevicenarian.com

401(k)

Posted by Tad Johnson - Feb 6th, 2008 at 15:02

So named from the section of tax law from which it came, this investment vehicle is a way for both you and your employer to save on taxes while you save for retirement. It has become a very popular option among employers, with many making it an automatic decision for new employees.It’s an easy way to save, but it’s not fool-proof. You are responsible for setting up your 401(k) and deciding what investments you want to make. Here’s what you need to know to take full advantage of your 401(k):

1. Take full advantage of employer match. Ask your HR department for information regarding the company match for the 401(k). Many companies will match 50-100% of your contributions, up to a set limit. For example, my company offers a 50% match up to a total of 4% of my income. So for me to take full advantage, I need to direct 8% of my income to my 401(k). This should be a no-brainer. If you don’t take advantage of your company match, you’re leaving money on the table.

2. Don’t put too many eggs in the company basket. Most 401(k) plans offer company stock as one of the investment options. Think twice before investing a significant portion of your 401(k) in company stock. Simply by being employed, you are investing in your company’s future. Keep your retirement investments separate so you won’t be devastated if your company falls on hard times. Use the rule of thumb that no more than 10% of your retirement savings should be in your company’s stock.

3. Consider your age when choosing investment options. Most 401(k) plans offer a wide variety of investment options with very different risk and return profiles. (The two go hand in hand; higher risk = higher return) As a vicenarian, risk can be your best friend. You have 30+ years before retirement, giving you plenty of time to weather any storms the stock market throws at you. Consider investing the bulk of your 401(k) in stock-based mutual funds, including plenty of international stocks. Although stocks will have up years and down, their overall trend for the past 80 years has been up, with an impressive average return of 8%.

With some basic planning and steady savings, you’ll have a comfortable retirement.