By Joseph McManus, RICP®, Financial Planner, Prudential Advisors
A successful 401(k) is a tactical plan for long term investing. People are living longer, meaning that retirements are lasting longer — sometimes 20 or 30 years. Smart people will invest in their 401(k) with the goal of having sufficient assets accumulated when retirement time comes. If you have some type of 401(k) offering at work, it’s a great opportunity to take charge of your financial future. If your workplace offers any type of matching program, be sure to take advantage. Especially in this economy, don’t leave extra money on the table.
Here are some tips that can help achieve 401(k) success.
1. Resist the urge to stop contributing to your workplace-provided retirement plan.
Yes, times are tough, and money is tight. But an important driver of human behavior is “inertia.” Once you’re in the plan, you tend to stay in it, and once you leave it, it will be tough to restart. Do yourself a favor and stay the course and reap the benefits when the economy recovers.
2. Keep your focus on the long term.
Retirement plans are long-term financial vehicles, so keep your eyes on the goals: investing as much as possible for your future retirement and investing for the long-term. Attempting to time the markets’ volatility may cause you to miss out on upturns you can’t predict.
3. Don’t take a loan or a withdrawal.
While many workplace-sponsored retirement plans permit loans and withdrawals, they are almost always a bad idea, primarily because you are reducing your assets and you may be jeopardizing your future financial health. Additionally, you might be subject to additional taxes and/or penalties. Withdrawals and distributions of taxable amounts are subject to ordinary income tax and, if made prior to age 59 ½, may be subject to an additional 10 percent federal income tax penalty. While loans are generally not taxable, if you leave your employer you could be faced with immediate taxation and penalties if you cannot raise the funds to pay off that loan. The best plan is to look elsewhere for immediate sources of emergency cash. You will thank yourself during your retirement years.
4. Think about retirement income rather than a retirement nest egg.
Many people forget that the whole point of a retirement funding strategy is to help create a stream of income to live on during retirement, when you will no longer receive a paycheck from your employer. So, take advantage of web-based tools that help you project how much retirement income your projected savings and investments will generate. For many people, it is much less than they imagine, which could suggest two solutions: working longer or saving more. Not completely enticing, of course, but probably better than not having enough money to survive during your retirement.
Staying the course and planning strategically may be the best ways to help achieve 401(k) success. Take a step back and look at the big picture.
For more information, contact Joseph McManus, RICP®, a Financial Planner with The Prudential Insurance Company of America’s Greater New England Financial Group, located at 293 Boston Post Road West, Suite 110, Marlborough, Mass. McManus can be reached at [email protected] and 508- 382-4904.