PRINT
EMAIL
COMMENT
BUZZ UP
DIGG THIS
I can understand why, in this dismal stock market, you might be disgusted with your retirement savings account -- your 401(k), your 403(b) or your IRA. Perhaps you're one of those who has scoffed that "My 401(k) is now a 201(k)." And I can understand why you might be tempted to dump your stocks and mutual funds at a loss and load up on Treasury
bonds or just park everything in cash.
I can understand, too, why you might consider suspending or trimming your periodic 401(k) contributions. Maybe your household budget is pinched and you need the money right now. Or maybe you're thinking about more-drastic action: tapping your retirement account for current expenses, even though you'll have to pay income taxes on early withdrawals plus a 10% penalty.
Yes, I can understand your temptation to do all these things. But doing so would be foolish, and I hope you won't.
The 401(k) edge
Quite simply, tax-deferred retirement plans are the best gift that Washington ever gave to American workers. Yes, I know they're not as sweet a deal as were the defined-benefit pension plans once common in the U.S. Employers funded those plans and bore all the investment risk, and there was no way that employees could raid their retirement funds early. But those pension plans aren't coming back, so there's no point in waxing nostalgic.
When I probe why people are disgusted with 401(k)s in general, I find that the real issue is not the concept. After all, what's not to like about getting an employer match to your own savings, and not having to pay taxes on the earnings inside the plan until retirement?
Instead, the issue for most people is the investments they chose for their 401(k). They are remorseful that their asset mix lacked diversity. Maybe they had too much in their employer's stock, which shouldn't represent more than 10% of the mix. Or, with retirement just a few years away, maybe they were too heavily invested in stock mutual funds.
John Bogle, the wise curmudgeon who founded Vanguard, thinks the percentage of interest-bearing investments in your retirement accounts should equal your age -- at age 55, for example, you would have 55% of your assets in bonds or cash and only 45% in stocks. That's a pretty conservative mix, but it would have prevented a massive erosion of your 401(k)'s value during this bear market.
If you're 30 years old, a 70% allocation to equities -- U.S. and foreign stocks, blue chips and small-company stocks, with some real estate investment trusts mixed in -- will likely outperform bonds and cash over the many years until your retirement. The 30% allocation to bonds and cash, which will rise as you age, will dampen your short-term risk in stocks.
Okay, so the damage has been done to your 401(k). Now what? First of all, get some advice. Talk to a financial planner about the right asset allocation for your age, income, wealth, goals and tolerance for risk.
See whether the administrator of your firm's 401(k) plan has some online advice or will send a planner to your office to help educate you and your fellow employees. Read up on your own. There's sound advice at Web sites such as ours, Kiplinger.com, and many others.
Don't sell low
What about the paper losses you've already incurred in your 401(k) or IRA? Don't dump high-quality stocks and well-managed mutual funds that have been hammered (see Should You Dump Your Fund?). From today's depressed levels, stocks and REITs offer stronger appreciation potential over the next few years than bonds and cash.
Most important, don't stop funding your retirement accounts. Keep making as big a monthly contribution as you can afford, to get the maximum employer match. Put the new money into an appropriate mix of assets. Then keep a cool head and be patient.
Columnist Knight Kiplinger is editor in chief of Kiplinger's Personal Finance magazine and of The Kiplinger Letter and Kiplinger.com.
POSTED BY: Raj (February 04, 2009 02:47 PM)
Lousy article - deserves only 2 stars! This guy dedicated a full-page in giving no real advice and rather redirected you to a financial planner. One paragraph referring to John Bogle’s wisdom is all you need if it appeals to you but personally it’s too conservative of an allocation for me. What if you start investing at 25, you allocate only 75% to stocks when you have ~40 years to retire. However, the formula seems reasonable as you approach retirement age.
POSTED BY: GFH (February 09, 2009 11:52 PM)
Unless you have over 20-25 years before retirement, you are toast-401K wise. Big sarcastic THANKS! to all the financial advisers that sold us stocks the last ten years.
POSTED BY: Brian (March 07, 2009 06:13 PM)
Wrong! These financial planner dogs are depending on the bones we throw them. So of course they advocate we keep shelling out more dollars to get the company match. So now I can continue to lose 35 to 40% and my employer can lose also! If we all stopped investing, the planners with their manicured nails would have to find real jobs. I'd rather listen to the Japanese saying..." If you've dug yourself into a hole.....stop digging."
Reprint Article
