After watching their 401K balances shrink up to 40% in 2008, many people are wondering if they should change their allocation to include more “safe” investments, or if they should move completely to “safe” investments then move back into the market later.
Here’s what Walter Updegrave with Money Magazine has to say about this:
But as understandable as the urge may be to transfer all your money into the investments that seem safest – stable value funds, capital preservation funds, money market funds and the like – that would be a mistake.
Yes, you have the option of switching back into stock and bond funds later on. But getting the timing right is difficult, if not impossible. You could easily end up missing the early stages of a market rebound, which would make it even harder for your 401(k) to regain lost ground.”
Updegrave goes on to say that now may be a great opportunity to take a more comprehensive review of your retirement planning strategy. While you should review your retirement plan on a regular basis anyway, it’s even more important after a bad year like 2008 to make sure you’re still on track to retire on time.
Updegrave has three retirement resolutions for investors for the new year:
Resolution #1: Kick up your savings a notch
For example, if someone 35 years old who makes $40,000 a year and gets 3% annual raises contributes 10% of salary to a 401(k) that earns 7% a year, that person would have $535,000 by age 65. But if the markets whack that 401(k) for a 25% loss on the eve of retirement, its value would fall to just over $400,000, requiring this would-be retiree to significantly scale back his retirement lifestyle or postpone retiring altogether.
But if this person had socked away just two percentage points more a year, or 12% of salary, he’d have a 401(k) worth about $642,000. That same 25% hit would drop his account’s value to roughly 482,000. While still a big loss, he might be able to retire on schedule by scaling back his spending a bit rather than postponing retirement altogether. Or he might not need to put off retiring for as long.
The point is that by saving more during your career, you’ll end up with a larger nest egg than you otherwise would, which gives you more maneuvering room if the markets turn against you or, for that matter, if you find you’re forced out of the workforce sooner than you would like.
Resolution #2: Create an actual retirement plan
Clearly, there are lots of moving parts here, so you can’t nail down all these variables with decimal-point precision. But you can make reasonable estimates. You can then fine tune your planning as your circumstances change and as you near retirement (and even once you begin living it).
Resolution #3: Resist the impulse to overreact when the markets go haywire
This is probably the hardest resolution to keep. The point of having a comprehensive plan is to set you on a course that can lead to a secure retirement even though the economy and financial markets will go through major upheavals along the way.
You can’t predict these ups and downs in advance or insulate yourself from them entirely. But a plan based on reasonable savings and realistic investing should allow you to roll with the economic punches and improve your chances of reaching retirement with the resources you’ll need.
The problem is sticking with the plan. When the markets take a dive as they have over the past year, there’s a natural tendency to feel you must take quick action to protect your nest egg. The same impulse to act arises when the markets soar to absurd heights as they did in the late 90s. Unfortunately, following these urges usually leads to trouble. It makes us more apt to invest too conservatively after a market setback and more likely to take on too much risk when the market is approaching unsustainable highs.
So once you’ve gone to the trouble to create a plan, don’t be so quick to dump it. Review it? Sure. Maybe you were overconfident when you originally set your stocks-bond mix, in which case you might want to re-think your asset allocation and re-assess how much you should be saving.
But if you abandon your plan whenever the economy slumps (or soars) or the stock market crashes (or takes off), then you don’t really have a plan at all. You’re winging it, which is the same as entrusting your retirement security to luck.”
You can read the complete article here: https://money.cnn.com/2009/01/05/pf/expert/retirement_resolutions.moneymag/index.htm?postversion=2009010609
Kristine McKinley is a fee only financial planner in Kansas City, Missouri. Kristine provides retirement planning, tax preparation and planning, investment reviews and comprehensive financial planning on a fee-only, as needed basis. To schedule your complimentary introduction meeting, please contact Kristine at kristine@beacon-advisor.com.