Robert Powell has written an article entitled, Seven ways to fully exploit your 401(k), and it appears on CBS MarketWatch. In it, he does what the title suggests and gives the reader seven important things to remember when planning for retirement. Here they are, with infamous Flexo commentary.
Enroll now. I have a friend of mine who has worked at her corporate job for several years, but even to this day I don’t believe she has started contributing to her 401(k) yet. She cites no time and not enough knowledge. I say it’s better to just fill in whatever paperwork needs to be done during lunch one day and go with the default options. It’s better than nothing.
Contribute the maximum allowed. The reality of this is, for people making a modest salary and living in an expensive area, it’s just not possible to invest $14,000 of salary — the maximum for 2005. I currently sock 12% of my salary into the 401(k) and still have a “meager” value to my account.
Sign up for automatic contribution increases. I strongly believe in this. It’s hard to notice gradual, slight changes, especially when they coincide with salary raises and such.
Diversify. Don’t just have a variety of funds, but look at the type of stocks held by those funds and try to make sure you have everything covered. It’s the best way to ensure the value of your holdings grow steadily over time, not that anything is ever guaranteed.
Rebalance. This is perfect for the lazy friend I mentioned above. Automatic rebalancing means that you can take better advantage of the medium-term rises and falls of different sectors of the market.
Simplify. The article says to consider life-cycle funds if you’re too lazy to worry about rebalancing. Just be aware that there are fees hidden in the values of these funds, or “funds of funds,” and you’ll generally end up with more value in the end if you take the time to be more diligent.
Analyze the big picture. The 401(k) shouldn’t be the only tool when planning how to finance your retirement. Taken to another meta-level, your retirement planning shouldn’t be the thought you give to your financial well-being.
Updated May 17, 2011 and originally published January 21, 2005.