If you’re like most people, your 401K is one of, if not the, most important keys to your future financial security. Managed properly, your 401K can have a significant impact on how comfortably you retire and what dreams you can — and can’t — see through to reality. But like most people, you probably don’t have much of a clue as to what to what the dos and don’ts of a “properly managed” 401K means. Let’s break it down.
Starting with the Dos:
1. Do take advantage of 401K whenever/wherever it’s offered: An employer-sponsored 401K is one of the best ways to build a substantial retirement fund. No matter how close or far you are from retirement, a 401K is a solid strategy. You’ll never look back and say, “Gee, I probably shouldn’t have saved so much.”
2. Do take advantage of the full company match: Many companies match their employees’ 401K contributions up to a certain amount. While not exactly “free” money as you do work for the privilege of participation, employer contributions compound right along with your own, growing your nest egg at a much faster rate.
And now for a few cautionary Don’ts:
1. Don’t keep too much money in the stable fund: Often called fixed or guaranteed funds, these funds sacrifice growth potential for stability. The rate of return on these funds is usually in the low single-digits and does not fluctuate with the stock or bond markets. If you are looking to outpace inflation or the potential for higher returns, don’t over-invest in stable funds.
2. Don’t over-invest in volatile securities without some stable back up: Volatile funds are not for the novice investor or feint of heart. While they offer a thrilling upside they also come with a potentially devastating downside. If your risk tolerance can’t stand a bit of thrill ride, make sure you build some protection into your investment strategy. A base of stable funds will provide you with some security and ensure that a portion of your contribution is consistently protected and secure.
3. Don’t ignore your 401K: When it comes to your 401K, nothing could be further from the truth than the adage “Ignorance is bliss”. While easy and tempting, ignoring your 401K could set up for a future that falls well short of bliss. Take time to understand your investment options, follow trends in the market, and respond when appropriate to keep your 401K on track with your goals.
Don’t know where to start? Talk with friends or family who understand investing and seek advice. Or, turn to a book from a reputable author or seek the advice of a professional. How you go about it doesn’t matter. The fact that you do it does.