Whether you’re 25 or 55, you know you’ll want to retire one day – and to retire in comfort you must save. And there’s simply no better way to save than the 401(k) plan at work. It’s automatic and painless — and, most importantly, your money grows tax-deferred for years, even decades, until you need it in retirement.
Will you reach retirement with a pittance, or with the wealth you need to live comfortably? The answer largely on the choices you make — including how much you invest, and which investments you select. These five simple steps can help you make a big difference in your efforts to reach retirement with lots of money in your retirement account:
1. Contribute as much as you possibly can to your 401(k).
You should participate to the maximum that your employer allows. If you can’t do that now, just start out with a small contribution – even just 1% of your pay – and increase it each year. When you get a raise, divert some of it to your 401(k) – you won’t notice because you’ll be placing money into the plan you never saw!
2. Create a highly diversified portfolio in your 401(k).
The best way to reduce investment risk is to invest in many asset classes. See if your plan offers funds that invest in U.S. stocks and foreign stocks, large and small companies, long-term and short-term bonds, government securities, real estate and more – so invest a little into them all. What’s the right allocation for you? Check out my Guide to Portfolio Selection at www.ricedelman.com – it’s fast, fun and free – to find the asset allocation that’s right for you.
3. Invest with a long-term view.
Many people fret that investments are volatile and unpredictable. But over long periods – like 20 or 30 years –volatility virtually evaporates. You’re saving for a retirement that is perhaps decades away, so ignore current market activity.
4. Remember to rebalance your 401(k) account.
Different investments will produce different results over time. This means your asset allocation will drift over time. You can easily fix this by rebalancing – once a year or so. Say you start with a 50/50 allocation and it shifts to 60/40. All you need do is sell some of the 60 and buy some of the 40 to restore it to 50/50. You can rebalance whenever you wish – a few times a year is often sufficient – and your plan probably lets you do it for free.
5. Never borrow from your 401 (k) plan.
Your 401(k) is meant to fund your retirement – period. Never use the money to buy a house or car, pay for a child’s college education, pay off debt or start a business. Borrowing severely erodes the future value of the account, placing your retirement at risk.
It’s a lot easier to create wealth in your retirement plan than you think, and these five tips can help you achieve the success you want.
Ric Edelman is a leading financial advisor, having been three times ranked the #1 Independent Financial Advisor in the nation by Barron’s. His television series The Truth About Money with Ric Edelman airs on Public Television stations across the country and his syndicated radio program can be heard in 67 markets nationwide. Ric is a best-selling author who has published seven books on personal finance and his newest book, The Truth About Retirement Plans and IRAs will be published in April by Simon and Schuster, a division of CBS. Visit Ric online at RicEdelman.com on Facebook and follow him on Twitter.
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