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Get the most from your 401(k)

By Kemberley Washington ·
Thursday, November 1, 2012
Posted: 11 am ET

Rising living costs, uncertainty surrounding Social Security and the ups and downs in the economy make it essential that you contribute to a 401(k).

If you are in your 20s or 30s, you may think retirement is too far away to start saving. If you are in your 50s and 60s, you may think there is nothing you can do at this point. But the reality is that contributing to your 401(k) is essential at any age.

Don't leave free money on the table

It is amazing how many people forgo contributing to their company's retirement plan. Not only are you losing out in reaching your retirement goals, but in many cases you also are actually leaving free money on the table.

Since many companies match an employee's contribution, the mere fact of participating can provide you with an instant return on your money. For instance, let's say you earn a monthly income of $1,000 and your company agrees to match dollar for dollar on the first 5 percent of your contributions. Not only are you personally saving $50 toward your retirement goals, but you are also getting an extra $50.

What stock can beat that?

Select the best asset allocation for you

People ask me all the time, "Which stocks or bonds should I invest in? Is there a hot investment that can make me rich?"

I am always cautious of giving a blanket statement. It really depends on what amount of risk you can afford to live with, your long-term financial goals and your time horizon.

For instance, if you expect to need the money 20 to 30 years out, you can afford to be more aggressive -- and you should be -- because you will be able to recoup any losses you incur.

However, if you need the money within a short time frame, it may not be a good idea to be so aggressive.

Take time to research and understand which asset allocation strategy is best for you. Also, consider life funds or target-date funds offered by your employer's retirement plan. These plans assign an asset allocation based on your expected retirement date.

I recently had a conversation with a friend who said, "I only invest in 'safe' investments because of my fear of losing money." It is important to understand you have to take on some risk in order to make money.

Merely putting your money away into your 401(k) without an adequate asset allocation strategy can hurt you as well. Keep in mind that your investments have to keep up with the rising costs of the dollar.

So remember, investing merely in money markets and certificates of deposit will not help you reach your long-term retirement goals.

Remember: Your choice, your future!

Follow me on Twitter: @Kemwashcpa

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