Mad Money

Cramer warns of one thing that could be toxic to your 401(k)

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For those investors who are serious about getting rich, Jim Cramer says that means preparing for retirement — regardless of age.

"Notice I didn't say save for retirement. I said prepare, because just stuffing your money in the first national bank of Sealy, a.k.a. stuffing it into your mattress, or automatically saving it into an IRA or 401(k), great though those two tax-deferred vehicles may be, might not be enough to prepare for your retirement," the "Mad Money" host said.

While Cramer is a proponent of both an individual retirement account (IRA) and a 401(k), he recommended that investors should first start with contributions to a 401(k) if it is available. Most companies will match contributions to a certain point, which is like getting free money.

However, there is a caveat to contributing to a 401(k), and that is what the money is used to invest in.

Investors should not use much of their 401(k) funds to buy stock in the companies that employ them, Cramer said.

One of the key components to investing is diversification. Otherwise, too much of a portfolio could be exposed to the same sector, which could introduce an enormous amount of risk.

That is why Cramer said investing retirement money into the same company that pays a salary is not a good idea. That is like putting savings into the same basket as a paycheck.

"You probably feel like you understand the company that you work for, and the excuse is that you're investing in what you know. I'm telling you, that excuse doesn't cut it," Cramer added.

When dealing with investing, regardless if it is a 401(k) or personal mad money, diversification comes before everything else. Never put more than one-fifth of funds toward the company that you work for, Cramer advised.

This way a retirement portfolio can be used as a building block for sustainable wealth that can take care of not only investors, but their families, too.

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