How to Maximize Your 401(k) Investment
Magazine Money

Step Up Your 401(k) Investing

Try to max out your contributions. In 2012, you can contribute as much as $17,000 to a 401(k). If you’re turning 50 or older by year’s end, the maximum contribution is $22,500. Those limits also apply to similar 403(b) and 457 plans. Even if you can’t afford to contribute the maximum, boosting your salary deferrals by small amounts can have a large payoff.

“I advise people to increase their contribution by one percentage point,” says Young. “If you are currently contributing 6% of pay, for example, make that 7%. You probably won’t miss the money, especially when you consider you’ll save more in taxes when you increase your contribution.”

At the minimum, you should contribute at least enough to get the full company match every year, according to Richard Peace, a certified financial planner in Colorado Springs, Colorado “If your company is matching up to 6% of pay,” he says, “contribute at least 6% of pay to your 401(k). If you don’t, you’re giving up a 100% return on your money. ”

Diversify your investments. “A key part of our strategy,” says Kevin “is to hold different types of assets in our 401(k) plans.” The couple’s holdings include fixed-income, stock, and international funds. When the stock market crashed in 2008 and 2009, bonds held up better than stocks, so the overall result wasn’t as bad as it was for other investors. Maintaining their 401(k) participation helped them enjoy the bull market of the past three years.

“By adding fixed income and limiting your exposure to stocks,” says Young, “you decrease the volatility of your overall investments. The greater your risk tolerance, the more you can invest in stocks. The lower your risk tolerance, the more you should add bonds to your 401(k) portfolio. Adds Peace: “Don’t overload on company stock. That can be a tragic mistake. If things go south at your company, you stand to lose not only your job, but also the 401(k) money you’ve invested in your employer’s stock. “Ideally you don’t want to have more than 5% of your portfolio in company stock,” says Young. “However, because company stock can be a part of compensation, it can be higher, but it should not be more than 15% to 20% of your total portfolio.”

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