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|Posted on February 22, 2012 at 12:13 AM||comments (313)|
|Posted on January 14, 2012 at 10:19 PM||comments (41)|
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Chances are you have a 401(k) plan at work. And the chances are you're not making nearly enough of it. A new year means a new leaf: This is as good a time as any to start turning that around.
If you're letting your 401(k) languish, a report released over the holiday season shows that you're not alone. According to the latest study by the Employee Benefits Research Institute, a think tank in Washington, most of us continue to neglect our 401(k) plan. The median account contains a balance of just $18,000, says EBRI.
Good luck with that.
Here's a five-step plan to fix your 401(k).
1 Take control.
Take a look at the full range of investment choices available to you. That should include, at a minimum, a handful of low-cost domestic and international stock and bond funds. If your plan doesn't even offer those you should talk to the people in charge at your employer and insist that they move to a better plan.
Many people are too intimidated, or busy, to choose their portfolio. If you're in that camp, your plan will have dumped your money into a default portfolio—such as a low-yielding but "stable" fund, or a target-date fund ostensibly designed for someone of your age.
There is nothing inherently wrong with these funds. But that doesn't mean you can rely on them, either.
These default options aren't designed for your best interests, but for the best interests of your plan provider. Instead of maximizing your likely returns, they are designed to minimize the provider's risk of a nasty lawsuit.
As a result, your money may well be sitting in a poorly designed portfolio that guarantees mediocre performance. Target-date funds, for example, are a great idea in theory. In practice, most are far too heavily weighted toward U.S. stocks, and they use a cookie-cutter approach to investing.
Consider the alternatives available to you.
You also should understand if your company makes matching contributions, and, if so, how much it will match. There's no good reason for missing out on a company match. It's also a good idea to find out if your plan allows such things as personal loans: This may offer you access to cheaper capital than a bank, although there are risks in borrowing from your plan.
2 Cut your costs.
Many 401(k) plan providers stock their plans with high-fee mutual funds. That's great for them, and bad for you. Most mutual funds are far too mediocre to justify hefty fees, which just soak up a lot of your investment returns. A fund that charges you an extra 1% a year may end up costing you most of the tax benefits of your plan.
There are managed investment funds out there that are worth the money, but few of them—if any—are likely to find their way into a 401(k) plan. If you're stuck with plain-vanilla funds, you are going to be better off going for the ones with the lowest costs. Nearly all the time your best options will be the low-cost index funds.
3 Lighten up on U.S. stocks.
Most people keep most of their stock-market investments in the U.S. It's safer, right? I mean, it's the home market so it's less risky than foreign stocks, yes?
That's what conventional wisdom says, but it's hooey. Investors sell themselves short by investing too much in the U.S.A. You're already overinvested here anyway—you have your life and career here.
And U.S. equities start 2012 looking relatively expensive. U.S. stocks today are somewhere between modestly and heavily overpriced when compared to such metrics as average earnings or the value of corporate assets, according to data from the Federal Reserve and data tracked by Yale University economics professor Robert Shiller.
The dividend yield on the Standard & Poor's 500-stock index, at just 2.1%, is very low by historical standards.
Predicting future stock-market returns is notoriously difficult. But based on current valuations, the U.S. stock market seems to offer a mediocre bet.
4 Look internationally.
Many 401(k) plans go light on international investment options. The real reason is simply the incompetence and complacency of plan sponsors.
But if your plan offers international options, take advantage. The turmoil of 2011 has left many overseas stock markets looking like a good value.
Western European markets fell nearly 30% from last year's peak. Japan's Nikkei 225 index is now lower than it was during the tsunami panic nearly a year ago. Emerging markets from Brazil to India, the investment hotshots of 2010, have dropped dramatically out of fashion again. Their stock markets crashed last year.
These offer some excellent buying opportunities.
Emerging markets account for about a third of the world economy, and their share is growing. Developed overseas markets, meaning Europe, Japan and Australasia, account for about two-fifths. They are on sale, and most people are underinvested there.
5 Review your bond funds.
As a general rule, your 401(k) and other tax shelters are where to hold the bond portion of your portfolio. That's because bonds are much more vulnerable to taxes than stocks.
Bonds generate most of their returns through coupons, and those are usually taxed at ordinary-income tax rates. By contrast, stock dividends and capital gains generally get taxed more lightly.
Right now is, admittedly, a risky time to invest in U.S. bonds. Yields on U.S. Treasurys have slumped to historic lows. Any pickup in the economy, and inflation, could send bond funds tumbling.
While Treasury bonds offer meager yields here, look at any corporate bond funds. That includes investment-grade bonds and more volatile high-yield bonds.Both offer somewhat better yields. Emerging-markets bonds offer particularly good opportunities, argues investment guru Rob Arnott, chairman of Research Affiliates. They pay higher interest rates than those in the U.S., while their governments' finances are actually in better shape.
It's crazy that most 401(k) plans offer such a limited range of investment options. Paradoxically you don't get full control of your money unless you leave your employer, when you can roll the plan over into a self-directed individual retirement account. But your 401(k) still represents a great investment asset, and this is a good time to get it into shape
|Posted on December 30, 2011 at 6:52 AM||comments (31)|
You don’t need a large paycheck to begin building a nest egg
Saving for retirement is especially difficult for workers with small salaries. Many low-income workers don't have access to a retirement account at work and simply have less money to build a nest egg after paying their monthly bills. Here are some strategies to save for the future on a small wage:
[See 9 Ways to Pay for Retirement.]
Set up a direct deposit. Have a portion of each paycheck automatically deposited into a 401(k), IRA, savings, or investment account. "Payroll deduction is one of the easiest ways for a worker to actually save," says David John, a senior research fellow for the Heritage Foundation. Start with as little as 1 percent of your pay and as you receive raises, direct a portion of each one into a retirement or investment account.
Take advantage of tax breaks. Saving in a retirement account has the added bonus of reducing your current or future taxes. Traditional 401(k)s and IRAs give you a tax break in the year you make the contribution, but income tax is due upon withdrawal. If you expect your income to grow significantly in the future, it can be smart to contribute after-tax dollars to a Roth 401(k) or Roth IRA. Roth accounts allow you to pay tax on your nest egg now while you are in a low-tax bracket, then withdrawals, including earnings, will be tax-free in retirement.
Claim the saver's credit. There is a tax credit specifically for low-income workers who save for retirement. If you contribute to a retirement account such as an IRA or 401(k) and your modified adjusted gross income is less than $28,250 ($56,500 for couples) in 2011, you may be able to claim the saver's credit. This credit is worth up to $1,000 for individuals and $2,000 for couples and can be used to reduce the federal income tax you pay, but is not refundable.
Redirect your tax refund and tax break. If you don't need your tax refund for immediate expenses or debts, consider saving a portion of it for retirement. Workers are also currently receiving a temporary 2 percent tax break on their Social Security payroll taxes in 2011. For someone who earns $30,000 annually, the tax break is worth $600. Consider directing that tax savings into a retirement account.
Minimize investment costs. The expenses and fees associated with an investment are deducted from your returns. "An IRA charges a fee to open the IRA, it charges annual fees, it charges closing fees if you decide to change jobs, it charges a trade commission if you trade. If you get a fund of funds, like a target-date fund, you are being charged for a management fee and then the underlying mutual fund fees," says Teresa Ghilarducci, director of the Schwartz Center for Economic Policy Analysis at the New School for Social Research. Avoiding as many of these fees as possible and choosing funds with low expense ratios will allow your nest egg to grow faster.
Delay retirement. Longer life spans mean even more years of retirement that need to be financed. Workers without traditional pensions may not be able to retire at the same age their parents stopped working. "Postponing retirement is an extremely powerful tool for those who are able to do it," says Mark Iwry, deputy assistant secretary for retirement and health policy at the U.S. Department of the Treasury. "You've got more years of earning. You've got fewer years of consuming as a retiree." Working longer doesn't mean you will need to work indefinitely. "People are living longer, healthier lives and fewer of them are working in physically demanding jobs," says Barbara Butrica, senior research associate at the Urban Institute. "Working an additional year, we found, raises retirement income by 9 percent overall and by 16 percent for low-wage workers."
Learn about Social Security. Social Security payments are the biggest source of retirement income for low-wage workers. "Social Security benefits are much more important to people with low income than private savings probably ever will be," says Butrica. The age when you decide to start your benefit can make a big difference in how much your monthly payments will be for the rest of your life. "Think carefully about whether you want to start that Social Security benefit right away when you hit 62, or whether it's really more valuable to you to wait until age 70 if you can do so," says Iwry. Monthly payouts increase for each year you delay claiming up until age 70.
Seek a job with good retirement benefits. Finding a job that offers a traditional pension, a significant 401(k) match, or a profit-sharing plan can significantly improve your retirement security. But only about half of the workforce has access to retirement benefits at work, and low-income workers are the least likely to have them. "About four in every ten 25- to 29-year-olds who are working are working in jobs that don't offer retirement plans," says Margery Austin Turner, vice president for research at the Urban Institute. "Low-income workers aren't accumulating the assets they are going to need for a secure retirement." When an employer contributes to a retirement plan, you can build a significant nest egg faster.
Don't spend your savings early. Once you begin to build a nest egg, try not to spend any of it before retirement. "Many of the withdrawals from 401(k)s and IRAs were associated with job loss and disability and investment sorts of things, like home purchases," says Butrica. For these types of emergencies you can sometimes tap your IRA savings early without being hit with the typical 10 percent early withdrawal penalty. But early withdrawals also mean that you won't have that money and the valuable compound interest it could have generated in retirement. "I think we need to encourage people to avoid unnecessarily dipping into their savings before retirement," says Butrica. "Workers must consistently make large contributions to their accounts to accumulate significant savings. This is going to be very difficult for low-wage workers to do."
|Posted on December 28, 2011 at 10:48 PM||comments (28)|
Negative headlines, 500-point-plus swings in the Dow Jones Industrial Average and economic uncertainty continue to fuel investors' fears. While some of those fears may be justified, financial advisers say you can harm your financial future if you let your fear keep you on the investing sidelines.
Here are five big fears that haunt investors and what financial advisers say you can do to overcome them:
1. Indexes Zeroing Out
Financial adviser Kurt Rozman recently met with a client who was convinced that the Standard & Poor's 500-stock index was going to end up at "zero by year-end" and that he would "go broke" if he didn't sell out of the market immediately.
"He envisioned an extremely unrealistic scenario," says the Brookfield, Wis.-based adviser.
Mr. Rozman explained to the client that for the S&P 500 to go to zero, all of the 500 largest companies in America would need to "go bust" at the exact same time and that was very unlikely to happen.
When a client is convinced of a "doomsday" scenario, Brad Klontz, a financial psychologist in Kapaa, Hawaii, encourages him or her to take a few deep breaths and repeat silently a phrase such as "relax." The client can then evaluate the accuracy of his or her thinking and look for evidence to support or refute that position. "Just because a thought comes into your mind, it doesn't mean it's true," Mr. Klontz says.
He also encourages clients to put some time between their initial impulse to react and the actions they wish to take so emotions play less of a role in their investment decisions.
2. Short-Term Volatility
After losing $400 in three months, the 24-year-old son of one of Ben Sullivan's clients decided he wanted to "bail out on stocks." Some clients' young-adult children are hesitant to invest in their company's 401(k) because their co-workers' fear of the market's volatility has affected their perspective, says the certified financial planner based in Scarsdale, N.Y.
While 500-plus point swings can be difficult to stomach, swearing off stocks or not investing in a 401(k) can be a big mistake, says Mr. Sullivan.
"When you have a 20- to 40-year time horizon," he says, "waiting to invest is likely riskier than losing a small amount in the short term."
Mr. Sullivan says he encouraged the 24-year-old to hold on to his investment strategy and recognize that when he retires, the $400 loss will be "long forgotten."
3. Investing in the Unfamiliar
In some cases, the fear of investing in the unfamiliar can be useful since there are some financial products that are too complex to understand and that investors may be better off avoiding, says Jared Kizer, a St. Louis-based investment adviser.
However, when taken to the extreme, investors may lack the diversification needed to meet their long-term retirement goals, he says.
Choosing investments just because they're familiar can also create unintended risk, Mr. Kizer adds.
For a client who invested nearly all of his life savings in his employer's stock, Mr. Kizer demonstrated how he would have a better chance of meeting his retirement goals if he invested in a variety of assets. Mr. Kizer also shared stories of investors who had lost their retirement savings when their employers went bankrupt.
4. Missing the Market
James Miller continues to field calls from some clients asking if they should "get out of the market now and get back in when things look safer."
The Chapel Hill, N.C.-based certified financial planner tells them that timing the market isn't the answer. He reminds them that when things look "safer," the market will likely be at a much higher level and the clients will have lost out on a significant amount of the upside by that point.
5. Not Having Enough Money to Invest
When clients have too much debt and too little cash flow, they often feel that they don't have enough money to invest, says Constance Stone, a Chagrin Falls, Ohio-based certified financial planner.
"It's often because the client's spending is irrational," she says.
Ms. Stone recently helped a couple in their early 30s with $132,000 in credit-card and school-loan debt scrutinize their monthly spending and find ways to cut back. In the end, the couple realized that by cutting down on expenses, such as meals out, they'd have money to save toward retirement.
"You can start small," she says.