401(k) do's and don'ts

For more information on managing your largest investment, check out Gerri Willis' 'Home Rich,' now in bookstores.

NEW YORK (CNNMoney.com) -- Retirement may seem like a fantasy if you watched your 401(k) crater over the last year. The average retirement portfolio lost 27% by the end of 2008.

In fact, many people report that they have stopped contributing to their retirement plan because they can no longer take the pain of watching their savings shrink.

Don't throw in the towel.

If you haven't looked at your 401(k) balance already, do so now. You can't fix it if you don't know what you own. Stop focusing on your losses. Money management firm Leuthold Group reports that stocks returned no less than 7.2% and as much as 15.6% annually in the decade following a long-term decline.

Check out cnnmoney.com's retirement calculators that will help you determine how much money you'll need to save.

Keep investing. Even if your employer has cut your 401(k) match you'll want to keep putting money away for retirement. In fact, in that case, you'd want to set even more money aside. For some of us, it makes sense to set up additional savings vehicles outside the 401(k).

Get diversified. Keep in mind that 401(k) investing doesn't just mean stock investing -- it means a balanced portfolio of stocks and bonds. You need to pursue a diversified approach.

Fix the mix. Most of us have seen the portion of our portfolio dedicated to stocks tank -- you'll want to deepen your contributions to stocks to make up for the difference. Remember, asset allocation is key to return over the long run.

Don't tap for non-emergencies. The costs of using your retirement money before retirement is excessive. If you are less than 59.5 years old, and you take a hardship withdrawal, you will pay a 10% penalty plus you'll pay income tax on what you took out.

If you take out a loan against your 401(k) and you lose your job, you have to pay the entire loan back and you'll be on the hook for the 10% penalty if you're less than 59.5 years old.

Don't leave your 401(k) behind. Once you are laid off or leave a company for any reason, it makes sense to roll your money over to an IRA. Not only are you likely to have more investment options, but you will also have more control over your money. Remember, 401(k) loans are only available to employees -- not folks who've been laid off.

Don't lose heart. You can and you will retirement -- there are lots of ways to "make it." In addition to Social Security and your retirement savings, you may also consult or do special work projects; you may get some help from the kids (after all, didn't you help them).

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