Monday, July 11, 2011

Investing: Five tips for making your 401(k) works a bit harder - The News-Press

Every so often, you get an ominous-looking package from your employer. It has numbers. And percentages. And words such as "large-company growth" and "mutual."

You ignore it, because it looks complicated, threatening and boring, all at the same time. But it's your 401(k) statement, so don't ignore it. Here are five tips from the pros - and USA TODAY readers - for making your 401(k) work harder.

Contribute, already

"Three words - maximize, maximize, maximize your contributions. OK, five words," writes Chuck Yanus, 57, of Crossville, Tenn.

The single most important factor in size of your retirement fund is how much you contribute.

The impact on your paycheck won't be as much as you think, because your contributions are tax-deferred. Say your annual gross salary is $50,000, and you get paid weekly. If you're in the 25 percent tax bracket, and contribute 5 percent of your salary, you'll put $48 into your 401(k) each week. But your salary will decrease $36, according to Fidelity Investment's take-home pay calculator. Kick up your contribution rate to 6 percent, and your salary will decrease just $8 more.

Figure out your asset allocation

Before you start pondering the difference between Pimco Total Return and Fidelity Contrafund, take a step back and try to figure out how much you want in stocks, bonds and money funds. That's more important than your choice of funds. Your returns from three asset classes the past 20 years, assuming you invested $100 a month, or $24,000 total:

- Stocks (as measured by the Standard & Poor's 500-stock index): $49,000.

- Bonds (measured by Barclay's intermediate-term Treasury index): $42,000.

- Cash (measured by three-month Treasury bills): $31,749.

Sell your company stock

"Never overload in your employer's stock," says Timothy Zuraff, 45, of Concord, N.C., adding, "Ten percent is the max to hold with your employer."

The main reason for mutual funds - and asset allocation, for that matter - is to reduce risk through diversification. If you have 50 percent of your portfolio in one stock, you run the risk of 50 percent of your portfolio going to zero.

Rebalance occasionally

When you set your asset allocation, you'll soon realize that it goes out of alignment quickly. From time to time, you'll have to sell some of your winning investments, and pour the proceeds into your losers - a process called rebalancing.

Rebalancing too often cuts short your winning investments. So only rebalance your investments whenever your asset allocation is 5 percentage points or more out of whack.

Read your statement ... but not too often

It's always good to know how you're doing.

However, if you're online every day checking your account, you might be tempted to do something rash.

Check your statement every quarter or so to make sure everything is going as planned, all your deposits have been made, and that all the matching has occurred, says Ray Ferrara, a financial planner in Clearwater.

View the original article here

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