How to Manage 401k Investment

401K investment is the most common investment vehicle used for retirement savings. The 401K investment is a tax deferred investment offered by your employer. Employer matches your 401K investment contribution to some extent. The matching ratio and limits vary from employer to employer. In 401K investment, both employee and employer contributions are tax deferred. It is very important to participate and take advantage of this pre-tax investment option. The following steps guide you through the process of establishing and managing your 401K investment.

Difficulty: Moderate

Instructions

1. Sign up for 401K investment with your employer as soon as you join the company. If you don't do this you lose the free money you get from the company as matching contribution.

2. Contribute your money to 401K investment to get the maximum possible match from the employer. You may contribute more( up to 15% of your salary) to take advantage of the tax benefit.

3. Access your 401K investment account to invest your contribution money. Your 401K investments are administered by a financial institution, not your employer. So, you need to get their information and know how to access your account. Normally your 401K investment account can be accessed online.

4. 
    
   401K investment

   Build your portfolio. Normally the 401K administrator offers a list of mutual funds for your 401K investment. Research these funds and pick few funds to invest your 401K contribution. Make sure you choose funds with good long track records. Keep both bond and equity funds in your portfolio. Since 401K investment is tax deferred, this is a good place to invest in high dividend yield bond funds.

5. 
    
   401K investment asset allocation

   Decide the asset allocation for the 401K investment. Normally younger people can have higher exposure to equity than older people. One commonly used rule is that your equity portion should be (100-your current age)%. According to this, a 35 year old will have 65% of the money in equity and 35% in bonds.

6. Keep monitoring your 401K investment. Periodically re balance the portfolio to keep your asset allocation intact. Don't worry about short term swings in your 401K investment performance. This is normal. Don't chase high performing funds by frequently switching your funds. Rear view mirror is not a guide to drive forward!

7. 
    
   401K investment

   Enjoy the long term tax deferred growth of your 401K investment. Don't take loan from 401K investment as it has lot of negative consequences. Gain in 401K account is NOT like a home equity!

[fortunate]

on 10/6/2009 Good article. There is a lot to write on investing, but this covers the most important steps. Thanks! 5*!