It is very important to have a time frame for your retirement. Whether or not this comes to fruition, you'll want to plan for it. If your retirement is still more than 20 years away, you can probably afford to keep most of your plan in investments with a higher level of risk, such as stocks. While you will undoubtedly experience the ups and downs of the stock market, time is on your side. Just don't panic when the inevitable downs come your way.
On the other hand, if your retirement goal is right around the corner, you will most likely want to work on preserving your portfolio. In this case, it might be in your best interest to take on less risk. If you find yourself in a position to preserve your wealth, don't be afraid to shift more of your portfolio to less risky investments, such as bonds, or even cash.
Contribute Money NOW
Most people, at one time or another, have found themselves saying they just don't have the extra cash to contribute to their retirement. While this may be the case for some, contributing just 1% of your pay is a good place to start. Try your hardest to increase this rate every year, until you max out. Furthermore, if your employer provides any type of match to your contribution, saving becomes even more important. And contributions are made on a pre-tax basis, providing you with a very nice tax benefit by shaving money off your tax bill.
Choose Investment Options Wisely
When it comes to picking which investments will make up your 401(k), this can be quite a challenging task. You absolutely must understand your investment options and choose those that are right for you. Don't swing for the next home-run investment. When it comes to saving for retirement, consistent, positive growth wins. Asset allocation is one of the most important factors in determining both return and risk of an investment portfolio, so you may want to consult a financial advisor for guidance.
Be Careful when Changing Jobs
Most people only change jobs about every four or five years. But if you do switch, don't forget about the 401(k) from your previous employer. More importantly, do not take a cash distribution of your plan's balance. If you do this, you'll be starting from scratch and will have to pay early withdrawal penalties and income tax. You do have options, though. You may be able to keep the money in your prior employer's plan. You can roll the money over into the new plan. Or you can roll the money into an IRA. The important thing is that your savings will continue to grow and you will not have to incur any penalties or pay any taxes.
Resist Borrowing from Your Plan
Borrowing from your retirement account, except for extreme circumstances, is generally a very bad idea. As with taking a cash distribution, you are derailing your savings plan. If you are paying back your loan, it's going to be a lot harder to maintain your current contribution rate. And once again there are tax implications. If you have to borrow, try other alternatives, and preserve your retirement account if at all possible.
Keep Beneficiary Information Up to Date
Call your human resources representative and ask about your current beneficiary designations. Don't waste all that hard work saving money only to have it go to someone who's no longer a part of your life.
From Morningstar Presentation Materials and Sales Ideas
Source: 2010 Morningstar. All rights reserved. Used with permission.
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