Investing Advice

How to manage your 401(k)

  • Take full advantage of any matching contributions from your company. It’s free money.
  • Make sure you allocate your savings to match your tolerance for risk. Less risk means some government bonds, more risk would be aggressive growth funds. Medium risk is an index mutual fund.

  • Get a prospectus on any funds offered by your plan and evaluate them carefully to pick the right ones for you. Don’t just look at the fund’s name, it can be misleading.

    • If the funds offered seem to be chronic under-performers, a safer choice is always an index fund.

    • Plans that offer “lifestyle” portfolios might be worth looking at. These are chosen to give you a choice of diversified portfolios that meet your risk tolerance and time to retirement horizon.

    What about using 401k money to pay off credit cards?

    This can be tempting when your cards are costing you 18-23% interest and you may be only earning 10% in your 401(k) or even losing money in a bad year.

    However, if you take $10,000 out, you’ll pay a $1,000 early withdrawal penalty and about $2,800 in income taxes to the IRS. In many states you will also pay about $500 to $800 in state taxes. This will leave you about $5,500 to pay on those cards. You’ve plundered your retirement savings and the compound growth potential of the $10,000 ($10,000 grows to $41,000 in 15 years at 10%) just to reduce your monthly credit card payments by $110 (2% minimum payment on $5,500). And then you would be tempted to run your credit cards right back up. Good plan!

    It is much better, if you owe a lot on your cards, to contribute just enough to your 401(k) to get the maximum match from your employer and use any extra money to pay off your bills. If there are no matching savings from your employer, you can stop contributing to the plan until all of your cards are paid off. Anyone who advises you otherwise really doesn’t understand everything that is involved here.

    By the way, 401(k) plans are protected from bankruptcy. Other Retirement Planning Topics:

    1. Retirement Planning
    2. IRA’s (Individual Retirement Account) – Traditional IRA
    3. Roth IRA – Taking Money Out
    4. Employer Sponsored Retirement Plans
    5. Retirement Plans - Continued
    6. 401K Savings
    7. Notes for 403(b) Plan Participants
    8. Senior citizens retirement resources
    9. Retirement Plans for Small Business and Sole Proprietors
    10. Simplified Employee Pension (SEP) IRAs
    11. SIMPLE (Savings Incentive Match Plan for Employees) IRA
    12. Your own 401(k) for the self-employed
    13. Employer Retirement Plan Vesting and Contribution
    14. Forgotten Retirement Benefits
    15. Other thoughts about retirement accounts
    16. Other thoughts about your retirement needs

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