If you participate in a 401(k) plan at work and aren’t sure if you are taking full advantage of the benefits, here are three tips for making the most of what could be your primary source of retirement savings
Understand Your Plan
A 401(k) plan is a pre-tax retirement savings vehicle. As such, it has a number of attractions. First, your pre-tax contributions don’t count as income; even though you are still receiving the money, you are not taxed on it. Also, any gains in your 401(k) account escape tax until you withdraw them, hopefully only during retirement, which is likely many years away, when your tax bracket may be much smaller. What’s more, many employers match a portion of the money their workers set aside for retirement, essentially adding “free money” to the 401(k) equation. Are you taking full advantage?
Contributing the maximum annual limit to your 401(k) may give you a better chance of meeting your retirement goals, but most people don’t max out their plans. A few don’t even know how much money they’re allowed to save.
Take Charge of Your Investments
More than half of plan participants feel uncomfortable making investment choices. Some let their employer auto-enroll them in their plan and haven’t made any adjustments since!
Over time, large gains or declines in individual investments or the market as a whole can knock your investment mix off-track. To get your 401(k) back in line, you have to rebalance—return your investments to their target allocations. Say you allocated 60% of your savings to stocks and 40% to bonds. The stock market rises, the bond market falls. Now your allocation is 70% stocks and 30% bonds. You’re exposed to more risk than you originally intended. Is that what you want? Thing is, most 401(k) plan holders rebalance their investments sporadically, or never.
Sources: Study on Financial Attitudes of the Middle Class by Northstar Research Partners for NestWise, January 2013; “Frequently Asked Questions About 401k) Plans,” Investment Company Institute, February 2013
* Study on Financial Attitudes of the Middle Class by Northstar Research Partners for NestWise, January 2013. This online survey consisted of 1053 individuals ages 27-55 with incomes $50k-150k who are the sole or joint decision maker for household investment decisions.
** “Frequently Asked Questions About 401k) Plans,” Investment Company Institute, February 2013
Copyright © 2013 NestWise LLC. All rights reserved. www.nestwise.com A Registered Investment Advisor