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How to Invest in Your 401k

A healthy retirement account is your key to peace of mind later in life but it doesn't happen on its own. Here's what you need to know about making your 401K work for you.

I think of each of my 401k accounts as children, individuals who, at times, are unruly and difficult to gather in one financial house. I’ve had it on my to-do list for a year to sit them all down for a chat. We need to assess how they are maturing on their own, and I imagine I’d insist that strengthening our family bond is far more important than an independent life that might put each of them (and me) in the poor house.

If only dealing with money came as naturally as dealing with people, then I wouldn’t have three 401ks — that I rarely manage — grating on my conscious. I’ve decided it’s time to make the most of my portfolio, and combine the old with the new, so that at the end of this rat race is an island in the Pacific with my name on it and the funds to sustain my laid-back lifestyle once I’m there.

More Money Now for My Island Later
If you invest in your own IRA or your company’s 401k, you actually have more cash in your pocket now since your contribution is tax-deferred. Money invested now is better than money invested later. Why? Because while money doesn’t grow on trees, it does indeed grow. Even in market fluctuations, if you’re under forty years old, stash away as much as you can when you can and when is now. You won’t pay income tax on it until you’re kicking your feet up in your hammock, which should translate into retirement, when you may be in a lower tax bracket due to less income coming in (unless swinging in a hammock and contemplating moments evolves into a business plan).

Out of Sight, Out of Pocket
Most companies will set up an automatic payroll deduction so that your money will go straight where it should, which is bi-monthly into your 401k. I’ve had to restructure my finances now that there is less in each paycheck, but out of sight is out of mind, and less in my pocket means more in my account come 2038!

Matching Gives You the Means
If your company has a matching program, take advantage. You can invest a percentage or an amount, and try to invest the maximum allowed and what you can afford. When I worked at a well-endowed university, not only did they match me, but also they put in one more full percentage point once I met their match. Of course that’s one account I still have to check in on, but matching is a no-brainer.

Don’t Be a Pushover, but Do a Rollover
This is my sticky point. Think of your retirement accounts as the luggage you want to keep near you at all times. Because when you know how your bags are packed and what your luggage looks like, it’s hard to lose any of it once you financially land. Find a financial advisor that you trust (many times your new plan comes with this option) and see if the new plan offers better returns than your old plan. I called on my investment banker relative to help me choose my funds in my new 401k plan and he was so thrilled with my choices that he encouraged me to rollover my two other plans. Great advice, and now I just have to get out of my fantasy hammock and get the paperwork started.

Keep Counting Your Bananas
Keep on top of your investments. I learned that was a solid bet in diversifying my plan among different funds, and that I could put a percentage of my bi-monthly investment into a Roth 401k. By doing this, my contributions to the Roth are made after-tax (compared to pre-tax with the traditional 401k) and allow me to withdraw from that fund after age fifty-nine and a half—and without penalty if I maintain the account for five years. I also made a personal plan to contact my investment advisor on a quarterly basis to go over my investments’ progress, and then I can make changes accordingly. Though I try to know more than my lot, I recognize that my relative — or managers of funds and retirement plans — make it their business to know more than I do, so I can stick to counting my bananas in my hammock after age sixty-five

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