Retirement - What To Do With Your 401(k) Plan Now?
The Dynamic Wealth Report
February 20, 2009
401k Plans Crushed... What To Do Now!
by Robert Morris
Is it time to throw in the towel on your 401(k) plan? Over the
last year, more than $1 trillion dollars has simply evaporated. Many
investors saved diligently for years. They’re now looking at account
balances down by 40% or more. With no end in sight to this grizzly of a
bear market, millions of Americans are feeling the overwhelming urge to
pull the plug on their 401(k)s.
Take the case of one of my good friends.
John is a prime example of the perfect saver. A 40 year old software
engineer, he started contributing to his company’s 401(k) plan at the
age of 22. He steadily increased his contributions over the years as his
income grew. His investments are diversified. And, he stuck to his plan
through good times and bad (even the bursting of the dot com bubble in
2000).
John called me in a panic.
His 401(k) has lost almost $180,000 in the past year. To make matters
worse, his employer recently announced a round of layoffs. He’s gone
from being on pace for an early retirement to possibly not retiring at
all. The abject fear in his voice sent shivers down my spine.
He fired off several questions in rapid succession.
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Should he keep making contributions? Should he move everything
into cash? Should he take a loan from the account to pay down his debts?
This is what I told him.
401(k) Tip #1: Make a plan.
Everyone should have a sound plan for achieving their retirement goals.
If you don’t know how much money you need for retirement, you can’t
possibly know how much to save or how to invest it. And, when times are
tough, your plan will help you evaluate the damage to your portfolio.
401(k) Tip #2: Keep making regular contributions and increase them if
you can.
The worst time to stop contributing to your 401(k) is when the market is
down. Think about it. When the price of gas falls, do you stop filling
up your car? No. If anything, you fill up more often before prices go
back up.
The same principle applies to your 401(k). You want to keep adding to
your investments (and buy more if you can) while they’re selling at a
discount. Lower prices mean you can buy more shares with the same
contribution. This lowers your average cost basis and sets you up for
bigger returns when the market recovers (and trust me, it will recover).
401(k) Tip #3: Review your asset allocation.
The foundation of your retirement plan is your asset allocation
strategy. This is the optimal mix of stocks, bonds, and cash for your
portfolio. The right mix for you depends on your specific goals, time
horizon, and tolerance for risk. Research shows more than 90% of your
long-term investment returns are determined by your asset allocation.
Right now is a critical time to review your asset allocation. While your
gut’s saying sell out of stocks entirely, your asset allocation might
say to buy more. Following a sound asset allocation strategy will bring
discipline to your decision-making and better long-term returns.
401(k) Tip #4: Diversify your investments and keep costs down.
As the old saying goes, “don’t put all your eggs in one basket.” Spread
your investments across several different mutual funds. Diversify by
size of company through large-cap, mid-cap, and small-cap stock funds. Get exposure to both growth and value investment styles. And, don’t
forget to include an international fund.
Keep your costs down by selecting funds with lower expense ratios. The
expense ratio pays for management fees and marketing costs. Don’t give
away more of your money than you have to.
Index funds will have the lowest expenses because they’re not actively
managed. Expense ratios for small-cap and international funds are higher
on average than those for large-cap domestic stock funds. As a general
rule, you shouldn’t pay more than 1.5% for a stock fund.
401(k) Tip #5: Don’t move all of your assets into cash just because the
market is down.
I know it’s scary to see huge losses on your account, but selling out
when the market’s down is a catastrophic mistake. Right now those losses
are on paper. If you sell out, you lock those losses in forever. If
retirement is still years or decades away, you have plenty of time for
your portfolio to recover.
401(k) Tip #6: Borrow from your 401(k) only as a last resort.
In these tough economic times, the temptation to borrow from your 401(k)
can be overwhelming. My advice is to first exhaust all other options. And, make sure the purpose of the money is important enough to justify
raiding your retirement plan.
Consider the consequences of taking the loan. Every dollar you take out
of your plan is one less dollar providing tax-deferred growth. If you
fail to repay the loan or make the scheduled interest payments, the loan
could be treated as taxable income. And, some plans require borrowers to
suspend making contributions to their plan for a period of time.
After I passed on my 401(k) tips, John felt a lot better about his
situation. He’s going to review his plan, assess the damage to his
portfolio, and make reasonable adjustments. He’s also going to explore
other options for paying down his debts before taking a loan from his 401(k).
Right now is a critical time for your retirement plan.
Don’t let fear of the bear push you into making a catastrophic mistake.
Follow my 401(k) tips and take back control of your future.
• Maxwell
(MXWL) was upgraded to a “BUY” at Roth
Securities. The capacitor and battery company might benefit from a surge
in alternative energy… if the economy ever improves.
• Eldorado Gold
(EGO) was downgraded by UBS. The gold
exploration company is well off its 52-week lows and approaching new
highs.
•
Needham started research coverage on Amazon
(AMZN). They rate the company a “BUY”… probably a good move as normal
brick and mortar stores are closing left and right.
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