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3 Ways to Maximize Your 401(k)

Are you getting the full benefit of your company's 401(k) plan? Not everyone is, but following these three simple rules will help you maximize not only your current benefits, but your long-term retirement plans as well.

The 401(k) market has changed substantially over the last three to five years. Many new investment options have been added, the rules have changed for contributions and Roth contributions have become another option for your plan. The 401(k) is quickly becoming more versatile and able to meet long-term retirement needs. By following these rules, you will get the most out of your plan today and put yourself in the best position in retirement.

1. Get your match. You've heard it a thousand times. Yet, you're still contributing the bare minimum to your plan. If your boss walked in and offered you a 3 percent raise, you'd never tell her "No thanks," but by not taking full advantage of matching contributions, that's exactly what you're doing. We often hear excuses like "It's only 2 percent," or "I don't like the vesting schedule," but these excuses can cost you thousands of dollars over your career.

The rule of 72 states that your money will double in the amount of time equal to 72 divided by your rate of return. So, if you get an 8 percent average rate of return, it would take nine years for your money to double. That means it would take nine years for that 1 percent match to turn into 2 percent. If you have longer than nine years before retirement, that 2 percent could become 4 percent. Repeat this process over a career and you're leaving big money on the table by not taking advantage of matching contributions. There's no excuse. You have to do it.

2. Rebalance annually. The stock markets fluctuate like sea currents: There are highs and lows with plenty of waves in between. If you were sailing across the world, you wouldn't set your navigation at the beginning of your trip and then let the seas take you to wherever the current pleased. The same guidance and direction should be applied to your retirement portfolio.

Managers leave, funds overperform or underperform their objectives and economic conditions change. If you change your funds on a daily or weekly basis, you'll likely suffer the same fate of about 90 percent of mutual fund managers by underperforming your index benchmark. However, if you schedule a time once a year, say in November, to make adjustments to your portfolio, then you can keep your focus on the long-term objective and make decisions more rationally.

In order to rebalance your portfolio, you should go back to your original allocation model from 12 months prior and compare it to your current portfolio's standing. Most retirement planning companies have software to allow you to gain an understanding of your allocation right from their website.

However, if you want more detail about your positions, Morningstar's Instant X-Ray tool does a great job at dissecting your current portfolio. It can break down several key details to give you a comprehensive look at the construction of your mutual fund positions, including stock type, world region, stock sector, diversification and more.

3. Use the Roth 401(k). Many people have heard of the Roth individual retirement account. This is the investment where you put away after-tax dollars, they grow tax-deferred and then you can get to them tax-free in retirement. The two caveats are, you are limited on your ability to contribute to a Roth if you make too much money and you can only put $5,500 (plus a $1,000 catch up for those over 50) per year into a Roth IRA.

The great thing about 401(k)s today is that most offer the Roth option. This simply means the plan now gives you the option to put your money into the regular (tax-deductible) account or you can put it into the Roth (after-tax) account. The same 401(k) contribution rules apply, in that you can put $17,500 into the plan (plus a $5,500 catch up for those over 50) and there are no income limitations for eligibility

Let me share one example of why it could be so important for you to use the Roth 401(k). I met with a client a few years ago who was retiring. We rolled over her 401(k) from the company where she had been working for over 30 years. When the rollover check arrived, it was in the amount of $2.3 million. That is a big 401(k). But remember, she was working for the company and contributing for over thirty years.

When I reviewed the paperwork that came with the rollover check, I saw that her total contributions only equaled about $300,000. The rest of the money was what she had earned off of her contributions. Back then, the Roth 401(k) did not exist like it does now.

But think about it. If this had been a Roth 401(k), the $300,000 would have been after-tax contributions, meaning it would have cost her some taxes up front. The real benefit would be in the tax-free $2 million she earned off of the contributions. Imagine that, $2 million without tax. As you can see, the Roth 401(K) is surely something to consider.

Retirement planning doesn't need to share the same stigma as filing taxes or going to the dentist. Follow the three recommendations above and you can build strong savings that will give you confidence in retirement.

Kelly Campbell, certified financial planner and accredited investment fiduciary, is the founder of Campbell Wealth Management and a registered investment advisor in Alexandria, Va. Campbell is also the author of "Fire Your Broker," a controversial look at the broker industry written as an empathetic response to the trials and tribulations that many investors have faced as the stock market cratered and their advisors abandoned their responsibilities to help them weather the storm.



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