Make Sure Your Retirement Plan Keeps Working
With US stock and bond markets climbing higher, it may be time to readjust your retirement plan, especially your contributory plan such as a 401(k) or 403(b) plan.
It's like tuning up a car or rebooting a computer suddenly gone awry.
But unlike getting a quickie-lube or pushing a button, rejigging your retirement plan requires some thought about long-term goals. Don't do it just because the stock market has gone topsy-turvy.
"It is always appropriate to see if your asset allocation plan [your particular mix of stocks, bonds and cash accounts] is in line with your long-range financial objectives, your risk level, and your investment time horizon," says Donald Johnson, an investment expert with the College for Financial Planning, in Denver.
"Your asset allocation is the key" to your long-range financial plan, says Professor Johnson.
You may re-allocate your funds based on changing circumstances, such as your stock portfolio becoming too large, because of the huge gains made in equities the last few years. But experts warn against changing your retirement portfolio based on market timing - seeking to profit based on the day-to-day gyrations of stocks.
According to the 401k Forum, an Internet site specializing in 401(k)/403(b) retirement issues (www.401kforum.com), 90 percent of total investment return comes from having the right investment mix, not from trying to time the market.
Set up an asset-allocation plan "that is right for your particular circumstances," Johnson says.
That does not mean that adjustments may not be in order due to sharp market swings, such as the downward drop in the main-market indexes from mid-July to late September.
"A lot of people were astounded at how uncomfortable they felt during that downturn," says Paula Hogan, who heads up Hogan Financial Planning, in Milwaukee.
That means they may have too much risk and might need to adjust accordingly. One rule of thumb calls for tailoring your investments so you can sleep at night.
For most investors, only some "small fiddling" seems in order right now, says Ms. Hogan. She likens the recent market turbulence to a "bad thunderstorm," but not a full-scale weather disaster.
What most investors fail to realize is that they have several options with their 401(k)/403(b) plans, experts say.
Example: One young woman, who works for a New York based retailer, says she didn't know that she could change the mix on her retirement accounts merely by calling an 800-number for the company at any hour of the day or night, and shifting her money around by pushing the buttons on the phone.
"I thought I had to go through a company representative, which I always dislike," she says.
Example: An employee of a publishing firm says she didn't realize she could call directly the companies offering mutual funds on her plan for changes in her account. She initially thought she had to use her firm's employee benefits department.
Say, for example, that you have a mutual fund account with XYZ Group, and that account contains $3,000, all in one equity fund which has been hard hit during the downturn.
By dialing XYZ's retirement department directly, you can switch your existing assets into different funds, including bond and money-market funds.
With some mutual-fund companies, you can have your current employee contribution go into one fund, and the employer contribution go into another fund.
There is usually no transaction fee for the exchange, or, at worst, only a small one. There could also be a redemption charge. You will need to check with your fund representative. But since qualified (that is, federally recognized) 401(k)/403(b) plans are tax-deferred (you pay taxes when you withdraw the money, presumably years from now) there are no immediate tax consequences in making a shift from one fund to another.
In addition to shifting funds by telephone, many fund companies let you make changes electronically, and quickly, via the Internet. Calling your employer's benefits' representative might take hours, especially if the department is busy, as often happens during periods of market instability.
Most importantly, don't make changes based on emotion, says Johnson. Stay alert to the "psychology" of the financial markets, he says.
With most markets - the one for automobiles, for example - consumers clamor to buy when prices go down. With financial markets, however, a drop in prices brings the opposite affect. Investors want to sell or are reluctant to buy. Yet that is often the best time to buy.
POINTS TO CONSIDER ABOUT MOVING YOUR RETIREMENT MONEY:
* Stocks for the long term
Over time, stocks outperform most other investments according to information-firm Ibbotson, Chicago. Even if you are retired, owning some stocks helps offset inflation.
* Shift for safety
If you are uncomfortable with a stock mutual fund, you can move some or all of your assets to a money-market fund from the same fund company, then shift back to the stock fund when you feel the market has righted itself. Check with your fund company about fees.
* Keep it close
Keep your account number and the 800-number on your fund companies with you.
* Ask questions
Learn about your options. Some fund families have exclusive funds for 401(k) investors, some offer funds you may not know about. Franklin-Templeton, for example, is well-known for global funds but also offers bond funds and a separate group called the Mutual Series.
* Invest regularly
Stick with consistent weekly or monthly investing, especially during downturns. You get more shares for your dollars because stock prices are cheaper. Consider enlarging your monthly investment. The time to buy may be when you are most uncomfortable with the market, say experts.
RETIREMENT PLANNING ON THE BACK BURNER
To manage a retirement plan, you first have to have one, and that's not as common as you might think.
A survey from the Lutheran Brotherhood, an insurance company based in Minneapolis, Minn., finds many Americans ill prepared for retirement.
* 54 percent of Americans have less than $100,000 available for retirement.
* 21 percent of people ages 50-64 have nothing put toward retirement.
* 44 percent of that age group has calculated their retirement needs.
* 23 percent of Americans nearing retirement don't know how much they have saved.
So why do Americans put it off? Almost half say they can't afford it, while 27 percent say they just haven't got around to it.
"It's the 'busyness' of society that puts [retirement planning] on the back burner," says Todd Gillingham, Lutheran Brotherhood's manager
Starting a nest egg often hinges on income. Twenty-one percent of Americans earning less than $20,000 a year have saved for retirement compared with 77 percent of people earning more than $50,000 per year.
Those Americans who do plan often make unplanned dips into retirement savings for everything from college tuition to buying a car. Baby boomers (ages 35-49) and men are most likely to spend part of their retirement money.
GenXers are more concerned and less apathetic about retirement, Mr. Gillingham says, because, "they are hearing a message about Social Security: If it's going to be around, it's going to be different."
The report finds that most Americans start saving at 29.5 years old, and the average retirement nest egg is $102,000,
- Lane Hartill