Q: I'm 50 and will be taking advantage of catch-up contributions in my 401(k). How should I allocate the 401(k) contributions, though?
A: For 2010, the Internal Revenue Service is permitting 401(k) plan participants over the age of 50 to contribute an extra $5,500 to their 401(k) plans. This additional, or "catch-up" contribution is slated to continue, with cost-of-living adjustments, in future years. As the term "catch-up contribution" suggests, this is a way that older participants can try to make up for under-contributing and/or investment losses in prior years.
As for how to allocate these "catch-up" contributions, there is always a limit to giving that kind of advice in the abstract, but this is a good opportunity to review some principles of retirement plan allocation:
- Match your investments with your time-frame. If your planned retirement is ten or more years off, your portfolio should have a healthy weighting of long-term investments, such as stocks and long-duration bonds. As your retirement date approaches, you should allocate more of your retirement savings to conservative vehicles, such as money market accounts, for stability and liquidity.
- When considering your time-frame, look beyond your retirement date. As noted above, your retirement date should be a factor in determining your asset allocation, but don't look at it as the end-point of your investment program. After retirement, you may continue to live off your retirement savings for twenty years or more, so allocate the assets accordingly.
- Set a course and stick to it. Determine an allocation based on your retirement date and long-term retirement needs, and don't make large changes in reaction to market ups and downs. Jumping in and out of the market can quickly throw a retirement plan off track.
If you don't feel comfortable making asset allocation decisions, see if your plan has any objectives-based or target-date options which will handle asset allocation for you within a single option.
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