Wednesday, February 25, 2009

6 Ways To Maximize Your 401(k)

Copy and Post by Mei Ling Lin

As with so many things in life, the responsibility for maximizing the potential benefits of your 401(k) plan falls largely on your shoulders. In this article, we'll give you six tips to make a healthy and growing 401(k) a reality.
1) Participate
If your employer offers a 401(k) plan, you should participate in the plan. The math is simple: if you don't put anything into it, you won't get anything out of it. Once you've made up your mind to get started, don't procrastinate. When it comes to 401(k) plans, time is your friend. The sooner you start contributing to the plan, the longer the span of time your money has to grow. If you delay participating, time works against you. To make up for lost time, your contribution rate will need to be higher and/or your rate of return greater to achieve the same retirement nest egg that could have been built with fewer dollars and lower rates of return had you started earlier.
2) Take the Company Match
One of the first questions that most 401(k) plan participants ask themselves is, "What percentage of my salary should I contribute?" This is an easy question to answer. Invest as much as you can afford, but no less than the amount required, to receive the full company match. The company match is free money. Think of it as an instant return on your investment, and don't let even one penny go to waste.
3) Plan
Proper asset allocation is responsible for the majority of investment returns. It is a time-tested principle that offers a valuable lesson for investors. So, learn from this lesson and plan your portfolio accordingly. If you start investing when you are young, take an aggressive approach and choose stocks over bonds. While it is true that stocks present a greater risk of loss than bonds, the potential rewards are also greater.
Once your portfolio is in place, monitor its performance. Keep in mind that various sectors of the stock market do not always move in lockstep. For example, if your portfolio contains both large-cap and small-cap stocks, it is very likely that the small-cap portion of the portfolio will grow more quickly than the large-cap portion. If this occurs, it may be time to rebalance your portfolio by selling some of your small-cap holdings and reinvesting the proceeds in large-cap stocks.


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