Perhaps I can help a bit. I just retired after 47 years in charge of compensation and benefits at a Fortune 200 company where I managed and communicated pensions, retirement planning and 401(k) plans among all other employee benefit programs.
For anyone who may be interested here are a few tips:
1. Always save to be sure that you obtain the full employer match, if any. It’s free money and even if your account tanks in a bad market, you would have to lose more than 50% of the value on the portion matched by the employer to actually lose any money.
2. Avoid putting all your eggs in one basket, especially your employer stock. Your job and your health care are probably dependent on your employer, why risk your future retirement as well? As soon as you can, move the vast majority of employer stock in your account to other investments. Think Enron! :-5
3. Stay well diversified, that means put your money in different investments, different asset classes. It does not mean simply place money in different mutual funds, they may all be investing in the same asset classes. Different asset classes means some in bonds, some in international stocks, and some in fixed income.
4. Rebalance your account or take advantage of automatic rebalancing if your plan offers it. That means that if you want 50% of your account in stocks and 50% in bonds, that as one investment goes up you have to sell some to buy the other so the balance stays 50/50.
5. If your plan offers what are called target retirement funds or pre-mixed portfolios take a close look at them as an option. Most people do not have the knowledge or time and interest to manage their accounts and invest wisely, with these types of funds that is all done for you; you set it and forget it. Such funds look at your target retirement date and put your money in a mix of funds appropriate for your age. For example, it you are 30 years away from retirement, the fund will be heavy in stocks, as you get closer to retirement, the fund automatically changes your investment mix so it becomes more fixed income to preserve your assets but generate earnings.
6. If your plan offers a Roth plan within your 401(k), take it. Earnings in a Roth are always tax free, plus unlike other investments money from a Roth is not counted in determining what portion of your Social Security benefit is taxable or in your earnings that determine your Medicare premium in the future. Take a look at the latest issue of Money ® or at cnnmoney.com for a good article on Roth options.
7. Save early and as much as you possibly can, especially when the market is declining. Many people make the mistake of either shifting money to fixed income AFTER the market tanks or stopping their savings. Remember, buy low, sell high, not the other way around.
Can’t afford to save? You can’t afford not to save; you just don’t know it yet.
Also, you are always better off saving sooner rather than later even if you have to cut back on your savings later in the game. Always save at least to get to the full company match and if you have no pension or other source of retirement income, you better be saving at least 10% of your gross income or you simply will not have enough to live on in the future.
8. Your greatest risk in retirement is not inflation, it is longevity. Your chance of outliving your money grows the older you get. If a man makes it to 65 he has a 50% of reaching 85 and if he makes it to 85 he has a 25% chance to see 95 and women have even better odds.
9. Your greatest financial burden in retirement will be health care, a combination of premiums and out of pocket costs. Even with Medicare and supplemental coverage the typical retiree will need about $200,000 to cover health care costs over their retired lifetime.
10. Make sure you know what expenses are coming from your account. These include expenses of the mutual funds, trustee funds and any expenses the employer may be taking from the trust as well. A good plan will have total costs less than 1.0% of plan assets and the bigger the plan the lower the percentage should be. The large $4 billion plans I manage have an expense of 0.18% of assets, but you are unlikely to be that low. However, if you see something above 1.25%, start yelling. High upfront expenses come from your investments and can take a big chunk out of future savings. :-1
11. Don’t overestimate how much you can take from your account each year when you retire AND don’t forget what you take out is taxable. In order to not outlive your 401(k), you should not plan on taking out more than half of each years gain. So, if your account earns 8%, plan on taking no more than 4% of your account balance that year.
If you have $200,000 in your account, do you really? Well, depending on your tax bracket, in terms of net money in your pocket it may be 15%, 25% or more less.
