A simple rule such as “contribute 10%” of your pay does not work for everyone. That may not be enough for a high-income earner, and it may be way too much for a lower earner. By the time you reach 55, you should have confidence that the amount you are saving is appropriate for your situation. If you aren’t sure how much to contribute, it’s time to get a retirement planner to help you figure it out. What is a good way to invest this portion of your nest egg? If you aren’t sure what to do, consider these three foolproof ways to invest 401(k) funds: use target-date funds, balanced funds, or model portfolios. These options automatically diversify the funds for you and keep you from the folly of only choosing funds that had the highest returns last year. Investing based on past returns is not a prudent approach. Maybe, each year, your company makes a profit-sharing contribution, but you must be employed on the last day of the year to be eligible. That would be worth knowing before you pick your retirement date. Take the time to learn what you need to do to be eligible for as much as possible. There are also age-related 401(k) withdrawal rules to know about. Many plans offer penalty-free withdrawals between age 55 and 59 1/2—only if you retire after reaching 55 and if your money stays in the plan. Taking money out of the plan could void the option to access it penalty-free, resulting in a 10% tax penalty. For example, if you leave your money in the plan but leave your employer between age 55 and 59 1/2, you may be able to access 401(k) money without paying the 10% early withdrawal penalty tax. If you roll it to an IRA, you would lose this option. Explore both the pros and cons of taking money out of your 401(k) plan before making a move. In most (but not all) cases, rolling money to an IRA can make sense, as it gives you a wider variety of investment options and gives you more ways to withdraw (some plans don’t let you take monthly distributions, for example). Also, with an IRA, it is easier to handle administrative items like address changes, beneficiary changes, and required distributions once you reach age 70 1/2.
