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Time For A 401(k) Checkup

We're a little more than half way through the year, and it's time to give your 401(k) a checkup. You want to ensure you're on track to maximize the tax savings, get all the match possible and that your investment allocation is in good shape given all the violent moves in the markets since January.

Maximize Contributions. The 401(k) rules allow you to contribute up to $16,500 in 2009, and if you're 50 or older this year, you can go as high as $22,000. So, are you on schedule to maximize your 401(k) contributions?

  • Ask your human resources department to give you an estimate of what your total contributions will be for the year. If you're behind, consider increasing your cotributions so that between now and December 31 you take full advantage of the tax savings available.
  • Remember, saving in a tax deferred vehicle is the fastest way to build your retirement assets. If you're in the 25 percent tax bracket and save $10,000 in your 401(k), then the full amount goes into the plan. If you don't put it in the plan, after you pay taxes, you're only left with $7,500. The choice is pretty clear.
Maximize The Match. If your employer provides a match, at a minimum make sure you're contributing enough to get the full match. The match is "free" money and there's no reason to leave it on the table.
  • If your employer matches say 50 percent of pay up to 6 percent, then make sure you're contributing at least 6 percent, because that takes your contribution from 6 percent to 9 percent. That's a 50 percent increase in your savings rate just by fully utilizing the match.
  • If you aren't sure how the match is calculated, contact your human resources department and find out what you need to do to fully participate in any match.
Investment Allocation. Because of all the volatility in the markets, many people just didn't look at their 401(k) balances over the last 6 months. Well, we've had some big changes in the numbers since March and this is a good time to evaluate where you stand.
  • While you're individual goals will dictate how you proceed, it's a good idea to confirm that your account is balanced between stocks and high quality bonds, and that you are well diversified in your holdings.
  • Most people have a hard time figuring this out. So if you're confused, make sure you ask for help. If you don't have your own advisor, you can try the 401(k) provider's resources. They often have individuals available to guide participants through the options in the plan.
Dollar Cost Averaging. Once your allocation is set, you should focus on the time-tested strategy of dollar cost averaging. This means you put a little money into the markets every month through your deferrals, and don't try to time things. It's simple and works remarkably well.
  • Just look at how quickly the market bounced off its March lows. Those waiting for the right time to get back in probably locked in losses during the decline and will now try to buy back in at higher prices.
  • Those who have continued to invest every month through their payroll deferrals have seen some big gains on the money they added to stocks between February and May, and they didn't have to time a thing.
Bottom line. Long term success is about taking consistent and prudent steps to stay on course. So take some time to investigate whether you're maximizing the benefits available from your 401(k) this year.

As with all financial matters, consult your individual advisor prior to making any financial decisions.

Photo from Flickr, courtesy of tiarescott, CC 2.0

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