Saving for Retirement
Put Your 401(k) Back to Work
Your best bet is to keep on contributing, stick with stocks and try not to raid your account.
By Laura Cohn, Associate Editor
From Kiplinger's Personal Finance magazine, April 2009
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The economic funk has made virtually everyone anxious about retirement. In fact, 83% of Americans worry that the recession will have a major impact on their retirement plans, according to a recent poll by the National Institute on Retirement Security.
Don't let economic jitters change your savings habits. Sticking with the tried-and-true practice of socking away as much as possible in your 401(k) or IRA -- or both -- should still put you on track for retirement. But we don't blame you for being concerned that your 401(k) has turned into a 201(k). We answer some common questions about how to pump up your depleted accounts.
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My employer has stopped contributing to my 401(k). Should I stop contributing, too? Absolutely not. Particularly now, with Standard & Poor's 500-stock index down 33% over the past year, you don't want to miss the chance to pick up stock-market bargains (see 7 Blue Chips to Hold Forever). Plus, if you stop putting money in your 401(k), you'll miss out on a valuable tax deduction. Say you're in the 25% federal tax bracket. If you contribute $4,000 to the plan, you'll save $1,000 in income taxes -- and even more when you include state tax savings.
I've already lost so much in my 401(k). Wouldn't it be better to keep my savings in cash until the market bounces back? You're in good company. Nearly one-third of those who participate in a 401(k) plan lost 30% or more last year, reports Mercer, a consulting firm.
But if you sit on the sidelines and venture back into the market only after it turns around, you risk missing out on the market's top-performing days, which tend to come at the beginning of a recovery. For instance, if you were fully invested in the S&P 500 from December 31, 1997, through December 31, 2007, you would have received an annualized return of 4.2%. But if you missed out on the index's 30 best days during that time period, you would have suffered average annual losses of 7.2%, according to an analysis by T. Rowe Price. No one knows exactly when the market will recover in the future, so it is better to keep your long-term money invested in stocks for the long haul.
I thought my tolerance for investment risk was pretty high -- until the stock market collapsed. What should I do now? Investing and risk go hand in hand. How much volatility you can stand depends on your age, your investment goals and your ability to sleep at night. If you are within a few years of retiring or close to reaching the dollar goal you've set for your retirement kitty, lock in your savings by reducing your risk, says Richard Ferri, chief executive officer of Portfolio Solutions, an investment adviser in Troy, Mich.
For instance, if you've determined you need $1 million by the time you're 65 and you have accumulated $900,000 by age 60, take your foot off the gas and cut your portfolio's stock holdings by 10%. You'll feel as if you're taking action, but, in reality, the move won't affect your portfolio that much. Then don't touch it again for at least a year. "There's nothing you can do about a bad economy except wait for it to get good again," Ferri says.