The past 12 months have been like a roller coaster ride through an economic horror show. On the downhill slope, we have seen brokerage and bank failures, a contentious presidential election, an $800 billion stimulus package and we hit the bottom in March when GM and Chrysler filed for bankruptcy. On the uphill slope, we have been teased by “glimmers of light,” heard screams about “cash for clunkers” and are in the middle of a brawl over health care reform.
Like most people you have probably been holding your head down while the economic roller coaster has been twisting, turning and going through its gyrations. You may have missed the fact that the stock market, as measured by the S&P 500 index, is up 52 percent from its low in March, but is still down 20 percent from a year ago. (Investors cannot invest directly in an index) This has been a gut wrenching trip, but like most good roller coaster rides, we may be close to getting back to the station. No wonder you’ve had neither the time nor the inclination to look at your 401(k) statements.
Where is your 401(k)?
If your 401(k) retirement account is like most, it is probably down about 20 percent from a year ago. Go online or look at your last statement and answer a few questions:
•How does the total value compare to a year ago?
•What are your percentages of equities/stocks, bonds and cash?
•How do these percentages compare with your desired percentages of each?
•What percentage of the total is in your company’s stock?
Are you satisfied with the overall performance of your account and the allocation of your investments? If not, you may be ready for a 401(k) makeover.
If your company uses one of the large 401(k) service providers, such as Fidelity or Vanguard, then the process is fairly straight forward, using the portfolio review systems available on their websites. If your 401(k) plan does not have a portfolio review system, then you may want to meet with your financial adviser or use the review system on websites such as: www.moneycentral.msn.com; www.quicken.com; and www.mint.com. Most of the portfolio review systems have three basic steps and may take you about an hour to complete.
First you provide some basic financial information about yourself, next you fill out a risk tolerance questionnaire and finally the system recommends a target asset allocation. The target allocations can range from very aggressive to very conservative based on your age, financial situation and risk tolerance.
Your current investments are then compared to your target allocation and you are asked if you want your account rebalanced to the target allocation. In the future, your portfolio would be rebalanced each year to the prescribed percentages.
Life Cycle Fund
Using Life Cycle Funds is a simpler way to manage your 401(k) retirement fund. To select a life cycle fund all that is required is your age, planned retirement age and the current year. In the early years, the life cycle funds invest more aggressively. As the individual approaches retirement age, the fund invests more conservatively.
Completing your 401(k) makeover
To complete your 401(k) makeover, you may want to consider two other areas:
•Contribution rate. Invest as much as possible in your 401(k) retirement account, since the contributions are made pre-tax and the gains accrue tax deferred. At retirement, withdrawals will be taxed at ordinary income tax rates. The minimum contribution should be at the level that will trigger the maximum employer match.
•Company stock. Many financial advisers encourage clients to limit their investment in their employer stock to no more that 5-10 percent of their net worth. If the company has financial difficulties, your job may be at risk, as well as your retirement funds.
Review your 401(k) to make sure it is in line with your financial objectives.
(Visit www.shinnfinancial.com or to send your comments or questions to firstname.lastname@example.org.)