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Are
You Investing Your 401(k) by
Anthony Braico |
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Your
image of a savvy investor may be someone who reads The Wall Street Journal every day and carries a Palm Pilot for
up-to-the-minute stock quotes. But, it’s just an image. Reality is very
different.
With a majority of companies moving away from
employer-directed pension plans toward employee-directed 401(k) retirement
plans, average Americans are encouraged to become proficient investors if
they want a chance at a comfortable retirement.
According to Access Research, a Connecticut firm that tracks 401(k)
trends, 17.5 million Americans now participate in the plans, up from 12
million just five years ago. Assets in 401(k)s are expected to grow from
about $720 billion now to over $1 trillion by the turn of the century.
With the initiation of 404(c) regulations, employers are urged to
offer employees more investment alternatives and provide basic education
about the potential risks and opportunities of investing. At the same
time, these employers must be careful not to position themselves as
investment advisers. It is a difficult situation and presents another
compelling reason why individuals must become more knowledgeable about how
to invest their retirement savings.
Unfortunately, personal finance education is not as prevalent in
our society as perhaps it should be. Schools do not normally require
students to study personal financial management and the majority of adults
probably have little more than an elementary idea of how to invest wisely.
Here are some 401(k) investing
tips to follow. But, remember, it is always wise to obtain assistance from
an investment professional.
Attend your company’s 401(k)
enrollment meeting.
Your employer will likely offer you a chance to attend an enrollment
meeting to learn more about your company’s 401(k) plan. In that meeting,
you should learn how much you’ll need to save for retirement and how
much your current savings will produce. It will help you calculate how
much money you should be putting into the 401(k).
Contribute as soon as possible.
A 401(k) plan enables you to contribute pre-tax dollars that compound
interest on a tax-deferred basis. The sooner you contribute to the plan,
the more you will benefit from the compounding of interest. For example,
if you place $7,000 into a 401(k) plan each year for 20 years, assuming
your total assets earn a return of 8%, your total assets at the end of the
period would equal $320,000. For ten years, with the same assumptions,
your total savings, before tax, would grow to only about $101,000. (Of
course, this example is not based on a specific investment vehicle and is
presented for illustrative purposes only.)
Contribute as much as possible.
It’s
wise to contribute as much as possible to your 401(k) plan. The amount you
contribute each pay period depends on how much your employer allows --
usually between 2% and 15%. For 2001, you are allowed to make a maximum
contribution to your 401(k) of 15% of your annual salary up to a maximum
of $10,500, an IRS-mandated index that is adjusted annually. Be sure to
consult a tax advisor prior to determining your contribution amount.
Take advantage of matching
contributions.
Many companies offer matching contributions. Some will match dollar for
dollar, others will contribute a certain percentage of your salary
depending on the amount you contribute. To get the most out of your
401(k), contribute at least the amount that will enable you to receive the
maximum matching contribution.
Invest for the long term. Your
savings should accumulate first from simply participating in your
company’s 401(k) plan, then from having the right investment mix. To
outpace inflation and the volatility of the markets, you need to become
more than a saver. You need to be an investor with a long horizon and a
solid financial plan. The stock market, with its volatility and risks,
scares many investors. But the potential reward for investing in equities
can be convincing. Historically, (since 1925), even with cyclical
downturns, large company stocks have returned an average 10.3% a year
before inflation. This does not mean you should put all your 401(k)
savings into stocks. Instead, you might want to consider the professional
management and diversification of stock mutual funds.(Be sure to obtain a
fund prospectus, which includes detailed information about the fund
including charges and expenses, and read it carefully before investing.)
Consult with an investment
executive or financial planner.
Meet with a professional who is qualified to assess your situation and
review your risk tolerance as it relates to various investments. Based on
this review, you will have to decide which investment choices best fit
your needs.
Stick with the plan.
Even if you become temporarily uncomfortable with the investment choices
in your plan, stay in it. The advantages of participating can be more
powerful than investment choices that fluctuate.
Diversify.
Most employers offer several choices for investing your 401(k)
contributions. For example, you may be able to allocate your contributions
among fixed income investments (such as FDIC-insured certificates of
deposit) and variable income investments (such as stocks or bonds).
Generally, it is wise to diversify your assets. And usually, the closer
you get to retirement, the less risk you should take and the more you
should consider fixed income investments.
Monitor your investments
regularly.
Monitoring performance and managing your 401(k) assets are important tasks
since they directly affect the balance of your savings at retirement. As
changes in the economy affect the markets, your investment returns may
fluctuate. Learn to expect and accept these fluctuations. All the while,
keeping in mind that you are saving over the long term, you may want to
make adjustments to reflect major market or lifestyle changes. As
with any investing activity, you should consult with an investment
professional for more thorough information. Copyright 2000, The Advest Group, Inc. All Rights Reserved |
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