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Make a Plan for Your Retirement Savings

The first step to effectively using your 401(k) is to assess your retirement needs.

How do you come up with the right amount to divert to your 401(k) plan?

Financial planners have traditionally estimated that retirees need 80% or more of preretirement income to maintain their standard of living, but individual situations vary greatly. Paying off a mortgage before retirement can substantially reduce need for income, while paying for health insurance can radically inflate it.

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Of course, you have to work within the investment options available to you. Typical plans offer about 18 investments, including stock and bond mutual funds; balanced funds, which invest in both; "target date" or asset-allocation funds, which include a mix of investments based on your age and how much risk you are willing to take; and fixed-interest investments, such as money-market accounts. About 15% of plans now allow participants to "self-direct" their account by buying individual stocks and bonds.

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