The 401(k) is probably one of the, if not the, most important tools in creating a successful retirement for most Americans. You can’t afford not to make sure you are making the most of your current 401(k) or old 401(k)s.
Many of us have worked for more than one company. As a result, we have accumulated more than one old 401(k). Regardless of where you are, you should not keep it at your old company. If you move (which many of us do every two to three years) these statements could get lost and you could lose track of your money. Another scenario is if the company goes out of business. While the money is yours and should be kept in a separate account, it could also get lost or tied up in litigation. Finally, by not keeping this money in your control and in one place, it is much harder to remain diversified and keep track of your investments.
So what should you do with the old 401(k)s? If you work for a company that has a 401(k) plan and will allow you, you should transfer your old 401(k) plan to your current 401(k) plan. This is the option because it lets you consolidate your retirement money to one place. If you can’t do this, then roll it over to a “Rollover IRA” at a place where you have other investments, ideally, a no-load mutual fund company. Keep your life as streamlined as possible.
Your Current 401(k): If you are not already contributing to your 401(k) plan, enroll and get started! For 2006, you can contribute up to $14,000 per year. If you can’t maximize the full amount of your contribution, start with 3% or an amount that your company matches. Even if your company doesn’t match your contribution, you should still enroll because it will save you money on your taxes and the money grows tax-free. However, the most important benefit of the 401(k) is that through automatic contribution, most people are able to save much more than those that don’t have automatic contributions setup.
If you aren’t maximizing your contributions to the 401(k) plan, increase your contribution by 1% every six months and every time you get a raise. Don’t invest in a ROTH IRA or Traditional IRA until you are maximizing your 401(k). The 401(k) plan let you put more money away and saves you money on your taxes as well.
In terms of investments, you shouldn’t invest more than 10% in your company stock. Remember Enron? If you can, stick to a well-diversified portfolio, with no more than four or five different types of mutual funds. If your company offers a Lifecycle or Target mutual fund, that is a great option, but make sure this is the only fund you choose.
The good news about your 401(k) is that once your contributions are setup and you have picked the proper investments; you only need to check it twice a year. Your retirement savings are on autopilot!
(Copyright Down-to-Earth Finance LLC 2006)