Tips to make the most of your 401(k)
Every choice you make involves risk, and investing for retirement is no exception. Knowing how much risk youre comfortable with can go a long way in preventing sleepless nights and uncertainty during volatile markets.Pay off high-cost debtLets say youre carrying $1,000 of debt on a credit card that charges 1.5 percent a month on the outstanding balance. Meanwhile, you get a $1,000 bonus. Should you use that bonus to pay off the credit card, or to invest in the 401(k)?Pay off the credit card first. If you didnt have to make a payment and just let that debt accumulate at 1.5 percent a month, at the end of a year it would be $1,195.62 — for an effective rate of return (to the lender!) of 19.56 percent. Leaving it there for an additional year would raise the debt to $1,429.50. And the interest is not deductible — you pay it with after-tax dollars. Not even a good 401(k) with a generous company match will keep up with that for long.Once youre not carrying high-cost debt, youre ready to invest in your 401(k).Be comfortable Selecting investments should be done with care and understanding. To make sound choices, be sure to ask questions about the mutual funds available in your 401(k) plan. Mutual funds are sold by prospectus which contains information about risk, return and other factors, can be obtained by calling your financial adviser. Read it carefully.Your retirement funds should be viewed as long-term investments, and capital growth is an important ingredient for long-term investment success. However, one years outstanding results for a particular security may not be repeated the next year. Make your selections with a view to consistent long-term performance.For each investment choice youre considering, read the information carefully. They contain a wealth of information about performance and risks.Levels of riskInvestment risk should be evaluated with an eye on the amount of time you have before you plan to retire. As a rule of thumb, if youre more than 10 years from retirement, the percentage of non-stock investments in your portfolio should be about half of your age. For example, if youre in your twenties, a portfolio with about 90 percent equities and 10 percent cash and bonds may provide the right combination of growth and safety.As you get older, you may need to have less of your money in stocks. In your 50s, for example, you may want to raise your non-stock proportion to 25 percent. And once youre within 10 years of retirement, you may want to raise the non-stock proportion faster. However, over time stocks have outperformed bonds, so you may want to keep some of your money in stocks to provide the potential for growth.Most 401(k) retirement plans offer a variety of mutual-fund choices (each of which is itself diversified over a broad range of securities) offering different investment objectives and styles. You can adjust your portfolio by investing portions of your retirement dollars in various funds. Using several different types of funds may add an extra dimension of safety to the diversification within each fund. For example, if youre just starting out in your career, you might invest 60 percent of your assets in an aggressive growth fund, 20 percent in a balanced fund (one that invests in both stocks and bonds), 10 percent in a global fund, and 10 percent in a bond fund.Review every year or soAs your circumstances change, your goals will change too. Even if your goals remain the same from one year to the next, youll need to make sure your portfolio is moving in the right direction.Much can be learned from reading the annual and semi-annual reports of the investments youve chosen. Maintain files of your quarterly retirement-plan statements. This will help you see how your account is performing over time and make adjustments as needed.If you like, you can also track daily results by checking the net asset value of your investments in your local newspaper or financial periodicals.Remember the key things to consider in order to effectively manage your investment risk:Asset allocation cannot eliminate the risk of fluctuating prices and uncertain returns.Ask questions about the investment choices.Read prospectuses and company reports.Establish a balance between stocks and other investments that gives you a good blend of growth potential and safety.Adjust your balance as you get closer to retirement.Dont expect last years performance by any investment to be matched next year.Check your investments each year to make sure theyre moving toward your goals.Take an active interest in managing your retirement plan. Its your money.The accuracy and completeness of this material are not guaranteed. The opinions expressed are those of Fraser M. Horn and Dudley M. Irwin and are not necessarily those of Berthel Fisher or its affiliates. The material is distributed solely for information purposes and is not a solicitation of an offer to buy any security or instrument or to participate in any trading strategy. Provided by courtesy of Fraser M. Horn and Dudley M. Irwin, Investment Adviser Representatives with Berthel Fisher in Edwards.Registered Representative of and securities offered through Berthel Fisher & Company Financial Services, Inc. (BFCFS). Member NASD/SIPC. 1st & Main Investment Advisors is independent of BFCFS.
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