how much to contribute to your retirement plan every month? That's
easy: Put in as much as you possibly can without leaving yourself
Every year the IRS puts a limit on how much pretax income you can
contribute to your retirement plan. For the year 2005 the maximum
is $14,000. This is quite a nice equalizer that prevents bigwig
executives from feathering their nests much more than the mail clerk.
If you want to contribute more, you can, but it'll have to come
from income you've already paid tax on. Though once in there, the
extra money can earn tax deferred until retirement.
Now you're a fully-fledged retirement plan partner, how do you make
the money work best for you? The good news is, if the company is
matching your contribution, you're already seeing an instant return.
to buy with the money? Your benefits department won't be able to
advise you here, because it would be legally and ethically problematic.
Ask your personal financial adviser, if you have one, or do your
best to allocate your contributions in a way that fits your risk
plan is different, but they're all regulated to offer variety. Typically
you have a choice of stock, bond, or money market mutual funds.
Choose a little from each or a few categories, as long as you don't
put all your eggs in one basket. Nothing is set in stone, so you
can easily move things around as your situation changes.
this is all about securing money for retirement, the degree of risk
you take should depend on how old you are and how much money's at
stake. If you're young, retirement is further off so you can take
more risks knowing you will have time to play it safe later.
are riskiest in the short run, but historically they actually yield
the best long-term rewards. There is a nice advantage built into
this plan. Since you're investing more or less the same amount every
month, you're following a popular strategy for successful investing
called dollar-cost averaging. Because the stock market has risen
consistently over time, investing this way means you're buying more
shares when prices are low.
you work for a publicly traded corporation, you might be able to
buy company shares in your plan, which is how Microsoft secretaries
got to be millionaires. But often the stocks offered in a retirement
plan are packaged in mutual funds.
Which fund is which?
There are several kinds of mutual funds, and it pays to understand
the differences. Growth funds invest primarily in the stocks of
young, fast-growing companies and can be a risky, aggressive way
to go. Income funds invest primarily in corporate and government
bonds. Putting money in investment-grade bonds is not high risk,
but some of these income funds chase big returns by investing in
lower-grade corporate bonds, so be sure to study the prospectus.
Growth and income funds mix stocks with bonds to offset some of
the risk. International/global funds deal with overseas securities,
which carry unique risks because of currency fluctuation and global
political and economic change.
Money market funds invest in short-term debt securities and
are all about playing it safe. Often you'll find some of the securities
are insured or guaranteed by the U.S. government. Consequently they're
not the biggest earners. If you prefer to take an ultra-cautious
approach (which most investors do), or you're approaching retirement
and want to at least maintain, then stick with investment-grade
bond or money market funds. But over the long haul the gains from
these plans are paltry compared to earnings from stock funds.
Audrey Arkins, Salary.com contributor- Modified 11-15-2004