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Five Tips To Manage Your 401(k) Wisely


Your 401(k) plan has been through a lot the past few years. Chances are, you saw the value of your plan assets plunge during the bear market, and after watching the account balance drop lower and lower, you may not even want to think about the current state of your retirement plan. But now, when times are better, is a great time to make sure you’re well positioned for the future. These suggestions could help.
1. Get back in the game. Almost seven in 10 employees who responded to a January 2010 survey by Francis Investment Counsel, a Wisconsin-based consultant to institutional retirement plans, had ended their participation in a 401(k) plan because of the recession or hadn’t made any changes to their savings or investments. While the stock market will continue to fluctuate, and it’s important to invest in a way that fits your long term goals and risk tolerance, choosing not to save for retirement guarantees failure. For 2011 (as in 2010), you can contribute up to $16,500 to your account, or $22,000 if you’re 50 or older.
2. Diversify, diversify, diversify. There’s no guarantee that spreading your account over a variety of investments will protect you from a loss in your account, especially in a declining market. However, this fundamental investing principle is a sensible approach for reducing investment risk.
3. Review asset allocations. Literally billions of dollars flowed out of stocks into fixed-income accounts after the stock market tailspin. But 401(k)s are built for the long term, intended to fund a retirement that may be decades in the future. And over extended periods of time, stocks have historically outperformed bonds. Again, the right mix for you depends on your financial goals and your ability to tolerate investment risk. But abandoning stocks completely could be shortsighted.
4. Avoid early distributions. Withdrawing money from your account before retirement can hurt you in several ways. Distributions before age 59½ normally incur a 10% penalty, and any money you withdraw from a normal tax-deferred 401(k)—even if it qualifies as a “hardship” withdrawal and avoids the 10% charge—will be taxed as income. Worse, depleting your account before retirement robs you of the value of long-term compounding of investment earnings.
5. Don’t borrow from your 401(k). For many of the same reasons, taking a loan from your 401(k) defeats its purpose—which is to help you build the largest possible retirement nest egg. Though you’ll pay interest on the loan back into your account, you’ll lose time, and if you change jobs you could have to repay the loan immediately or risk having it treated as an early withdrawal.

This article was written by a professional financial journalist for Legend Financial Advisors, Inc. and is not intended as legal or investment advice.

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