How to make the most of a 401(k) plan

Since the financial crisis of 2008 became a reality for most investment portfolios, many 401k plans have lost their luster. Whether you are already heavily invested in a 401k plan or just getting ready to initiate contributions, it is important that you follow some simple guidelines to help you build your account or recoup all of those losses.

Barring some type of unforeseen catastrophe, the stock market will rise again. Well-managed mutual funds that constitute large amounts of 401k plans will grow significantly.

Begin to invest like tomorrow will be better.


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At this point in the cycle, most 401k plan managers have made the adjustments to compensate for earlier losses. Rebuilding the funds will take time. Investors are already starting to see that their 401k plans are no longer in a financial free fall. The majority of mutual funds have stabilized and have begun to grow again.

Remember that 401k investments are before taxes.


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This means that for every $100 that you invest in a 401k, it will reduce your take home pay by only about $75 because you do not pay taxes on the money invested until you begin withdrawals after retirement. If you have invested $10,000 in the account, it has only cost you about $7,500 so far.

Most 401k accounts did not take much more of a hit than 25%. This means that even for those who feel like they lost a fortune, they are probably somewhere around the break-even point.

Factor in employer contributions if your company offers this benefit.


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While not all employers contribute to employee 401k accounts, some do. These amounts can range from 25% of the employee contribution up to a dollar for dollar match. If you are fortunate enough to have employer contributions to your 401k, it is almost impossible to lose money in the long run. You may not make the fortune of your dreams, but you account will grow nicely over the years.

Unless you are already retired, time is on your side with retirement accounts.


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Even if you are nearing retirement, you have the option to delay accessing your 401k for a few years. This can give it time to recover even further from any declines. Even two or three years can reverse a lot of losses in a larger account. For new investors, realize that every downturn in the stock market is eventually followed by record breaking highs. Getting into a 401k or adding to it aggressively during a down market, almost always will yield decent percentage returns within 5 to 10 years.

In all cases, invest with your eye on your age.


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The amount of money being invested is not the issue as you age. The amount of risk that your investments carry is. If you have control over the allocation of your 401k funds, reduce the risk as your age increases. If you are within 5 to 7 years of retirement, investing in aggressive growth funds is probably not the way to go even if you want to recover lost assets. Remember that the more aggressive funds also are the most likely to generate heavy losses in a shorter time span. Younger investors should put at least 25 to 30% of their investments into more aggressive funds to build greater wealth over the long haul.

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