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Scrutinize 401(k) Fees
Tweet Share on Facebook December 23, 2008 CommentAll sorts of fees—including administrative, transaction, and investment management charges—can whittle away your nest egg over time. If a worker invests $5,000 annually in a 401(k) over a 35-year period and pays 1.5 percent of the account balance in fees (using constant 2008 dollars and assuming an after-inflation return of 4.9 percent annually), he will have $345,000 at retirement. If the same worker can cut expenses to 0.5 percent of the account balance, his nest egg will be $423,000 at retirement—$78,000 more. But keeping costs low can be difficult because not all 401(k) fees are fully disclosed. Many financial advisers think a reasonable rate to aim for is an expense ratio of 1 percent or less. Low-cost index funds are typically a good way to invest in stocks at rock-bottom prices.
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Determine Your Risk Tolerance
Tweet Share on Facebook December 23, 2008 CommentAfter losing $2 trillion in their retirement accounts this year, consumers have a right to feel a little spooked about keeping their nest eggs in the stock market. The key to weathering this financial crisis is to find a level of risk in your portfolio that you can live with that also helps you build wealth for retirement. "People in this environment tend to invest to extremes—too much risk or too little risk—and you pay a price both ways," says Jonathan Pond, a financial planner and author of You Can Do It! The Boomer's Guide to a Great Retirement. "If you have gotten out of stocks, get back into stocks gradually. If you are 90 percent invested in stocks, don't sit there with a decimated portfolio and hope for the best. I would get back to a more reasonably diversified portfolio—about 50 percent in stocks. That way, at least you will mitigate future losses."
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Rebalance Your Portfolio
Tweet Share on Facebook December 23, 2008 CommentIf you were invested 50 percent in stocks and 50 percent in bonds at the beginning of the year, your portfolio almost certainly doesn't have those proportions anymore, because you have probably taken big losses in stocks. "The temptation this year is going to be to stay where you are or get rid of stocks. Most people today should probably buy stocks," says Andrew Biggs, a resident scholar at the American Enterprise Institute and a former deputy commissioner for policy at the Social Security Administration. "Whatever ratio people have, people should think about where they want to be and be proactive about getting their portfolio back where it should be."
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Evaluate Your Target-Date Fund
Tweet Share on Facebook December 23, 2008 CommentTarget-date funds are designed to automatically shift investments to become more conservative as you age. But these fix-it-and-forget-it funds are hardly one size fits all. A Watson Wyatt analysis of various target-date funds showed that allocations to equities for employees 10 years from retirement varied widely—from 40 percent to 80 percent. And on the day of retirement, equity allocations ranged from 20 to 65 percent. Ask your plan administrator how much of your fund is invested in the stock market at various ages. If that's not a level of risk you can live with, pick a different fund.
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Pay Off Your Mortgage
Tweet Share on Facebook December 23, 2008 Comment (4)The benchmark interest rate on a 30-year fixed-rate mortgage has dipped as low as 5.17 percent, according to Freddie Mac. If you're getting a significantly higher return in the stock market (very doubtful right now), it might make sense to keep your mortgage going into retirement. But if you're not an investment wizard or don't want to take the risk, start prepaying your mortgage principal as you approach retirement. "You get an absolutely safe return by paying off your mortgage," says Laurence Kotlikoff, a Boston University economics professor and coauthor of Spend 'Til the End: The Revolutionary Guide to Raising Your Living Standard—Today and When You Retire. "If you have a 7 percent mortgage and 3 percent deflation right now, that means that you are paying 10 percent on your mortgage. Every dollar you pay [down on your mortgage principal] now is giving you a 10 percent real return."
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For Retirement Security: Get a Pension
Tweet Share on Facebook December 23, 2008 Comment (3)Simply finding a job in 2009 will be challenging for many people. “But if you can, seek an employer offering a traditional pension,” advises Beth Almeida, executive director of the National Institute on Retirement Security. “Pensions offer what Americans are looking for: the security and peace of mind of a regular monthly check that lasts as long as you do with payments continuing to your spouse even after you're gone. It’s a much better solution than on your own retirement that is subject to the wild volatility of the financial markets and can run out.” The average pension and annuity income for retirees over age 50 was $16,989 in 2007, according to the Employee Benefit Research Institute. Public sector pensions were considerably higher, averaging $23,721, while the typical private sector worker got $12,721. If you add Social Security and a little bit of personal savings to those pension amounts, you should have a fairly comfortable retirement in most parts of the country.
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Downsize Expenses
Tweet Share on Facebook December 23, 2008 CommentEvery year Americans make resolutions to skip the daily latte and pack a lunch for work. Cutting small expenses can, indeed, add up over time. A bigger immediate bang for your efforts can be found by downsizing from two cars to one, moving into more inexpensive housing, or relocating to a part of town or an area of the country with a lower cost of living. Check out these low cost and low tax places to retire.
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Bump Up Your Contributions
Tweet Share on Facebook December 23, 2008 CommentFace it. Without a traditional pension, the only paths to a secure retirement are to save more, cut expenses, or both. That's not easy to do when immediate expenses are demanding a portion of your paycheck before it even clears the bank. If you do manage to get a raise next year, consider diverting it to your retirement account. Says Jonathan Pond, a financial planner and author of You Can Do It! The Boomer's Guide to a Great Retirement,: "The only sure way to create wealth is to save regularly and to regularly increase the amount of money you're saving, or live beneath your means."
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Money-Related New Year’s Resolutions
Tweet Share on Facebook December 23, 2008 CommentMany Americans will try to save extra cash and develop better money habits next year. I asked Olivia Mitchell, director of the Boettner Center for Pensions and Retirement Security at the University of Pennsylvania’s Wharton School, what her New Year’s resolutions will be. Her response:
1. Convince my twenty-something daughters that they really must start saving for retirement right away.
2. Set up mental accounts earmarked for specific purposes: the rainy day fund, the education fund, and the try to pay off the mortgage soon fund. Each will have a separate identity, so any spare pennies get put out of the way and removed from temptation.
3. Work on building skills so that I am still employable into my 70s.
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More Companies are Planning to Cut 401(k) Matches
Tweet Share on Facebook December 22, 2008 CommentFinancially stressed companies are trying to eliminate employee benefit costs, increasingly by reducing or axing 401(k) company contributions. FedEx and Motorola both announced that they were suspending their 401(k) matches last week. They joined the ranks of General Motors and Kodak and many other financially struggling companies that are trimming their 401(k) employer contributions in an effort to free up cash. And more companies are planning to thin their 401(k) match next year.
A Watson Wyatt survey conducted in October found that 2 percent of companies had already reduced their employer 401(k) or 403(b) match and another 4 percent planned to do so within 12 months. A recent update to that survey conducted this month found that 3 percent of the companies surveyed have now slimed their 401(k) match and another 7 percent of firms will begin their retirement contribution diet next year.
But the 401(k) weight reduction plan won’t be the only cause of scrawnier nest eggs next year. The number of employees taking loans from retirement accounts has jumped from 19 percent in October to 27 percent in December, Watson Wyatt found. And 59 percent of employees have moved their 401(k) or 403(b) investment mix out of equities, compared with 53 percent in October. If only dieting were as easy as slimming down your nest egg.
