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Retirement Planning: The 401k Plan Basics

If you're young and just beginning your career, retirement planning may seem so far off that it's the last thing on your mind. If you're on the opposite side of the fence, with retirement approaching, you may be trying to figure out how to handle it. Regardless of your unique situation, it's an absolute must that start preparing now. With the gas prices at new highs, recession fears, and Social Security instability, retirement planning is not what it used to be. As a result you must invest for your retirement, not necessarily save for it.

First of all, your place of employment may or may not offer some sort of retirement plan. Back in the day these were called pension plans and the were a solid part of the retirement planning process. As the economy turns into a more competitive global economy these older more reliable plans are becoming a thing of the past. As a replacement, you should be offered something by the name of a 401k retirement plan.

401k plans are a powerful way to invest for retirement over time. They usually allow you to invest in a number of mutual funds and company stock. When making your investment selection it's important to practice diversification. You should spread out your investments in different asset classes. And most importantly, let's let the Enron debacle provide us with a good example of what not to do. You should never have all your retirement funds in your company stock. Never. No matter how solid you think your company is, things can go bad. And when they do go bad, you've not only lost your job, but your retirement too.

Now, if your employer does not offer a 401k plan, it's more important then ever to take a proactive approach. You'll want to set up an Individual Retirement Account, or IRA. An IRA is an excellent way to start your retirement planning process, especially when a 401k plan is not available to you. Traditional IRA's allow you to deduct contributions, so you get the taxed deferred growth until retirement. Roth IRA's work adversely, in that they are not deductible upon contribution, but are completely free of tax in retirement.

The most important step in retirement planning is the simplest one--getting started. The earlier you take action and start investing for your retirement the much larger your retirement. Time is a funny thing, starting early is more important than getting great returns or investing large amounts. Take the first step and just get started, no matter how small the investment.

If you're company offers a 401k plan it's even more prudent to start early. Most companies offer a company match for your 401k plan contributions. This means that for every dollar you contribute, they'll often match that dollar for dollar, up to a certain limit. So, at the very least you should utilize a 401k plan up to the company retirement plan match. This is easy money, as you'll be receiving a 100 percent return on your money, right off the bat. Where are you going to get those returns? The answer, is not anywhere without a lot of risk. You can then add that 100 percent to any market returns you capture over time. And the beauty of it all is a $100 deduction out of your payroll will feel like less because it's pre-tax. All these benefits really make starting a 401k plan a no-brainer.

When getting started with the 401k process, just get started. If you have access to a 401k plan, take advantage of it. If you don't it's probably even more important to take advantage of an IRA. Secure your financial future today.

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