The 401(k) plan has become thefoundation for building wealthfor retirement. Unfortunately,not everyone eligible for theseplans participates. This is a financial mistakeand if you fall into this group, nowis the time to begin to put your financesback on track. To help guide you, the followingare the five best strategies forsupercharging your 401(k) plan:
1. Max the match. If I said, "Forevery dollar that you invest, I will guaranteethat you will double your moneyin your first year," how many dollarswould you be willing to come up with?I hope your answer is that you wouldfind a way to play this game as long asit lasts. That's exactly what manyemployers do by providing a matchingcontribution for employees who contributeto their company 401(k) plan.Many plans will match 25%, 50%, oreven 100% of the first 3% to 6% ofyour compensation. It is true that youmust be willing to invest your dollar forthe long term, but don't lose sight of thepower of a matching contribution. Noother investment strategy will offer asmuch potential.
2. Focus on stock mutual funds.Historically, stocks return approximatelydouble the return of bonds. Thishas been true in the past and it shouldbe true in the future. If you are 10 ormore years away from retirement, Iwould recommend at least an 80% allocationin stocks. If you are 5 years awayfrom retirement, your allocation tostocks should be at least 60%, and duringretirement, you should have at least50% of your investments in stocks.
3. Repay loans. Most retirement plansallow you to borrow from your account.If you borrow money from your plan,make paying off that loan a priority.One of the most important features of a401(k) plan is tax-deferred growth.Some people like the idea of borrowingfrom their 401(k) plan based on the ideathat they are borrowing from themselves.You are not borrowing fromyourself; you are stealing from yourself.
4. Increase contributions. Should youcontinue to invest in your 401(k) planmore money than the amount the companymatches? Absolutely. While youdon't get the benefits of additionalmatching contributions, you do continueto get a tax-deferred growth andavoid taxes on the contributions.Increasing your contributions is easierthan you think. If you are in a 28%marginal tax bracket, a $1000 contributiononly costs you $720. The governmentpays the rest for you. One wayto systematically increase your contributionis to commit half of all pay raisesto your 401(k) plan. You'll be surprisedhow fast this will add up.
5. Stick with it. A recent study revealsthat over 40% of people who changedjobs actually cashed in their 401(k) plan,which creates income taxes and oftenfederal penalties as well. Make sure thatyou and your family understand theimportance of your retirement plan. It isa gift to yourself of financial abundanceduring your elder years.
founder of The Welch Group,
LLC, which specializes in providing
fee-only wealth management
services to affluent retirees
and health care professionals
throughout the United States. He is the coauthor
of J.K. Lasser's New Rules for Estate and Tax
Planning (John Wiley & Sons, Inc; 2001). He
welcomes questions or comments at 800-709-7100 or visit www.welchgroup.com. This article
was reprinted with permission from the
Birmingham Post Herald.
Stewart H. Welch III