With traditional pensions going the way of typewriters and eight-track tape players, it's more important than ever to take charge of your retirement savings. If your employer offers a 401(k) plan, you have a ready-made tool for arriving at a financially secure retirement. Unfortunately, many people don't contribute even a little to their company's 401(k) plan.
Or if they do contribute, they make mistakes - easily avoided mistakes - that can diminish the potential of this great retirement vehicle.
Here are a few pitfalls to avoid.
Don't neglect the company match.
Even if you can't contribute a big percentage of your salary, you should contribute at least as much as your company matches. Say, for example, for every dollar you contribute to your 401(k), your firm matches 50 cents.
Let's also say the company will make these contributions up to five percent of your gross salary. Do the math. You should contribute at least five percent of every paycheck to your 401(k). Otherwise, you're walking away from a 50% return on your investment in the first year.
Diversify.
Your overall portfolio, including savings outside your 401(k), should include a variety of stocks, bonds, and more liquid investments. These investments should include holdings in large, medium, and small companies, both inside and perhaps outside the United States.
The goal is to balance your investment risk. If one segment of the global market takes a ride down, you don't want your whole portfolio to plummet.
Don't hold too much company stock.
Just ask the folks at Enron or the myriad dotcom companies whose portfolios were heavily weighted with company stock. No matter how strong your firm seems today, you don't want to risk your future by holding too much stock in a single corporation.
Don't take out 401(k) loans.
Using your retirement savings as a cash machine can be a trap. Sure, you can tap your 401(k) account money and pay yourself back with interest. But in the meantime, your portfolio is smaller and, therefore, earning a smaller return.
Furthermore, what happens if you lose your job or change jobs? That outstanding balance on your 401(k) loan becomes a distribution, which may be subject to a 10% early withdrawal penalty and income taxes.
It's generally better to find other sources of funds for your short-term needs.
If you need additional help with your 401(k) planning, give us a call.
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