The 401(k) plan has become the single largest source of retirement savings for a majority of American workers. The dollars in your 401(k) savings plan may represent a substantial portion of your income during retirement.
While the volatile markets have many people questioning the value of their 401(k), it is still one of the best ways to prepare successfully for retirement.
The government, and by extension, your employer, are giving you the opportunity to take advantage of two very powerful financial concepts: the ability to save money on a pre-tax basis, and the tax-deferred, compounded growth of those dollars. A 401(k) enables you to potentially build a significant nest egg because of that tax-deferred growth.
Saving money before it is included in your taxable income reduces your annual tax bill. In addition, the earnings can grow on a tax-deferred basis, meaning you can earn money on your earnings! You need to join the plan, as soon as you can, and save as much as you can. It is the first step in taking charge of your financial future.
The Importance of the Right Allocation
The first step in the 401(k) process is to allocate your money among the investment options available within your 401(k) plan. If you do not allocate it properly, the 401(k) can become, at best, a savings account and, at worst, a high-risk gamble with your retirement money.
Asset allocation is the principle of deciding how to spread your investments across various asset classes, such as stocks, bonds, and cash. The idea is to diversify your holdings in order to potentially increase returns while diminishing risk. Many factors determine the appropriate allocation for each individual – when you need the money (not automatically dictated by your retirement age), how much money you have now and expect to need later, what kind of risks you’re willing to take, and what other assets you have invested outside of your 401(k).
While it is not advisable to move your money around daily (market timing has not proven to be an effective strategy over the long haul), it is advisable to look at what your investments are doing on a regular basis. If one segment of the market has outperformed other segments significantly, then your portfolio may be out of balance. If you wanted to have 70% of your money in stocks, and it has grown to represent 80% of your portfolio, you need to rebalance. You may also need to consider other strategic moves if your investment suffers from style drift, there’s a change in management, or if similar investments with lower expenses become available.
Footnotes, disclosures, and sources:
These are the views of Platinum Advisor Marketing Strategies, LLC, and not necessarily those of the named representative, Broker dealer or Investment Advisor, and should not be construed as investment advice. Neither the named representative nor the named Broker Dealer or Investment Advisor gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your financial advisor for further information.
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