Though the term "do-it-yourself" typically relates to the home improvement it can just as easily apply to retirement planning in general, and to the 401(k) plan in particular. The benefits of a 401(k) are hard to be: contributions are tax-deductible, you typically get a matching contribution from your employer, and both your contributions and earnings grow tax-deferred until they are withdrawn.
1. Know Your Plan
Today, 401(k) plans offer more investment choices, enhanced employer contributions, and better reporting. To maximize the benefits of your 401(k), you need to know and understand your plan and its features. Take the time to read the material your employer provides.
2. Contribute to the Maximum
To get the most out of your 401(k), you have to put the most into it. Your company sets the maximum contribution as a percentage of your salary up to the IRS limit ($10,000 for 1998 and 1999). Keep in mind that each dollar you contribute to your 401(k) is deducted from your taxable income so you avoid paying taxes on that money until it's withdraw, typically at retirement. And since all the interest and capital gains earned in your 401(k) grow tax-free until withdrawn, your money grows at a faster rate than it would in a taxable investment.
3.Invest for the Long Term
Most company plans provide a broad range of investment options. Typically a plan will offer one or more stock mutual funds, a bond fund or fixed-income contracts, a balanced fund, a money market mutual fund, and, perhaps, an international fund. Often, investment in the compan's own stock is another option.
Strive for a diversified mix of investments. The further you are from retirement, the more you can afford to take a few risks and invest in stocks or stock mutual funds. As you get closer to retirement, you can shift your allocation so it's more heavily weighted toward vehicles that are subject to less marketplace vulnerability. But don't do away with stocks altogether as they play an important role in the continued growth of your retirement nest egg.
4. Monitor Your Investments
It's your responsibility to keep a close watch on the performance of your 401(k) investments. Most plans provide quarterly reports and some even have a toll-free number for up-to-date balance figures. Review your reports carefully and compare your fund's performances to those in the Standard & Poor's 500-Stock Index or to other performance averages for the different types of funds you hold. How often you can change your investments and your allocations depends on your plan's rules. Some have fixed dates, some permit only a certain number of transfers per year; the better plans allow daily adjustments. Don't get carried away trying to time the market.
5. KEEP AN EYE ON EXPENSES
The do-it-yourself nature of 401(k) plans extends to paying investment fees and administrative costs. You are responsible for paying these expenses, which are typically deducted from your plan and reduce your earnings. If you feel these expenses are too high, don't be shy about bringing your concerns to your employer's attention.