Subscribe to erollover.com Blog by Email I started contributing to my 401k-Now What? By Mike Rowan for www.Erollover.com 2008 “My company matches 50 cents for every dollar I put into my 401(k). I just started this year and have a balance of about $1,200. I know nothing about investing, however. So what should I invest in to increase my account balance?†–Real Client First, let me congratulate you for taking the single most important step in planning for your retirement: signing up for your 401(k) plan. Unfortunately, many people don’t see their 401k or IRA plans as an urgent priority, choosing instead to live for the moment. That's especially true among young workers. A recent survey by Hewitt Associates found that almost 70 percent of Generation Y workers (those 18 to 25 years old) don't bother to contribute. Retirement for these individuals is 30 or 40 years away, which is extremely hard to fathom in some cases. Many times this potential retirement money is spent on depreciating assets, like nice cars and the like. Whatever the reason, missing out on the chance to save through a 401(k) is a big mistake, especially when your employer is kicking in matching bucks. I mean, it's not often you have someone giving you free money. So now that you've taken that big first step, how do you tend to maximize the benefits of your 401k or retirement plan? Understandably, you've probably immediately turned your attention to investing. After all, the higher the return you earn on your contributions (and your employer's match), the larger your nest egg will be come retirement time. Contribute first, invest later But as important as smart investing is in building your 401(k)'s balance over the long term, before you turn your attention to that front there's something else you want to be sure you're doing-namely, contributing as much as you possibly can. That's right, although we tend to concentrate our efforts to the investing side of the equation, the fact is when it comes to surefire ways of boosting your balance, shoveling in more money has a much bigger (and more certain) effect than savvy investing. A study done by Putnam Investments last year illustrated this point very well. Basically, Putnam created a hypothetical "Average Joe," who began participating in his 401(k) at age 28 in 1990, but got off on the wrong foot. He contributed very little, invested too little of his account in stock funds and he also chose funds that didn't perform very well. The study then compared how Joe would have fared over the next 25 years had he made certain moves, namely: boosting the percentage of pay that he saved, increasing his exposure to stocks and choosing better-performing funds. The study found that while Joe certainly would have boosted his 401(k) balance by picking better funds and tilting his portfolio mix more toward stocks, the gains from those two moves didn't come close to the increase Joe would see if he dramatically boosted the amount he saved-even if he remained invested in underperforming funds. The moral: if you really want to increase your 401(k)'s balance, you should first make sure you're contributing as much as you possibly can to your account. At the very least, you want to contribute enough to take full advantage of your employer's match. But beyond that you ought to try to contribute as much as your plan allows. Picking the right mix Once you're saving to the max, you can then concentrate on the investing part. Here your first priority is to make sure you're divvying up your portfolio properly between stocks and bonds. A variety of studies show that your asset allocation - the mix between stock and bonds - is what largely determines the performance of your investment portfolio. The more you have in stocks, the higher your returns are likely to be over the long term. So why not throw the whole shebang in stock funds? Well, for one thing you can never be absolutely sure that future performance will repeat the past, so it pays to hedge your bets. And besides, the more stocks you own in your 401(k), the bigger the hit your account will take during market downturns. If you devote too much to stocks, a big loss might frighten you out of stocks completely, undermining your long-term strategy. To arrive at a mix that's appropriate for you, you can check out our Asset Allocator. As for specific investments in your 401(k), you're limited to the menu of funds that your employer provides. (This is also a great reason to always roll your 401k into a self directed IRA if you were ever to switch jobs.) Ideally, you want to choose funds that have low costs, decent track records and a history of treating shareholders decently. Index funds are also almost always a good bet. Their costs are typically low and since they're designed to mirror a particular market index or benchmark, you know exactly what you're getting. We have outlined some basic steps and strategies for your 401k, IRA, or retirement plan. While no course of action is absolutely bullet-proof, at least making an aggressive effort to contribute early and often should set you in the most advantageous path. Please visit our site for more retirement and 401k details: www.erollover.com Featured Sponsor:
