How to Maximize Your 401k Benefits

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Knowing where you want to be financially during retirement is the first step to maximizing your 401k benefits.

A 401k is an employer-sponsored retirement plan that allows employers to contribute funds directly from their salary. Generally, taxes are not taken out until after the money is withdrawn from the employee's account. However, some employers offer Roth 401ks or retirement plans that withdraw employee contributions after taxes. Unlike pensions that are solely managed by employers, employees control how their money is distributed across the different asset classes available in 401k plans. The earlier employees start investing in their 401k plans, the greater the potential for receiving higher returns during retirement.

Instructions

    • 1

      Assess your financial situation. Plan a budget to determine how much pay you can contribute before or after taxes, depending on the retirement vehicles provided by your employer. Consider your financial goals and the length of time you would need to achieve your retirement target. Write these goals in an investment policy statement or investment plan that you can refer to throughout your career.

    • 2

      Contribute the maximum allowed in your company 401k. Evaluate your choice of mutual funds and research the historical returns for each. Consider enrolling in either a target-date or low-cost index fund. Choose an aggressive asset allocation that weighs more heavily towards stocks if you are just starting your career and have at least 10 years or more until retirement. Select a more conservative asset mix that leans towards bonds if you are closer to retirement.

    • 3

      Find out whether your employer matches a percentage of your contributions. Set your contribution at the level that maximizes your company's match if you cannot contribute the maximum percentage for your overall 401k plan.

    • 4

      Continue to review your investment portfolio to make sure you are on track. Look at factors such as your investment return, overall market performance, financial constraints and asset allocation mix. Tweak your asset allocation mix if the projected returns start to fall short of your targets. Make your portfolio more conservative as you approach retirement to minimize risk and substantial losses.

Tips & Warnings

  • Use electronic and online tools such as paycheck calculators to estimate how increasing your pre-tax contribution will affect your take-home pay.

  • Remember that when you leave a company, you take 100 percent of your contributions. However, employer matches may be vested depending on factors such as your length of tenure at the organization.

  • Avoid skewing your 401k plan too heavily towards stocks if you are five years or less away from retirement. A February 2010 Moneywatch.com article cites a Morningstar chart, which suggests at least a 40 percent mix in bond funds for individuals retiring within five years.

  • Although reviewing your plan on a quarterly, semiannual or annual basis is recommended, reallocating asset classes too frequently can hurt your returns in the long run. Likewise, neglecting to check your 401k performance-particularly if a large percentage of your funds remain in one asset class-can also negatively impact earnings potential.

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References

  • Photo Credit Goodshoot/Goodshoot/Getty Images

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