If your 401(k) took a huge hit thanks to the recent recession (some would argue it was a depression), you’re not alone. Employees across the country saw their retirement savings balances dwindle — and some panicked, moving their money out of their 401(k) accounts and into much more conservative investments like CDs and savings bonds.
But did they miss out on the stock market boomlet?
Back in March, I messed around with my investments, which were aggressive and diversified to begin with because I’m still at least 35 years away from retirement. I reallocated future paycheck deductions even more heavily into stocks, hoping for a rebound. Hey, I was already down 40% for 2008. I didn’t feel I had that much more to lose. And stocks did rebound — I’m up 30% for the year, wiping out a lot of the losses from last year. My money bought more stock because it was “cheap,” and when stocks rose over the summer, my 401(k) benefitted.
Some suggestions for those investing in 401(k) as retirement vehicles:
1. If you’re under 30 — Put it all in stocks, baby! But not 100% of contributions — save some love for the bonds (keep it under 10% of your contributions, though). You’re far enough away from retirement to gamble a bit with your money and take some risks. Hope for big returns! Remember to put some in a target-year retirement fund.
2. If you’re in your 40s and 50s — Tone your investments down a notch. Aim for a balanced 401(k) portfolio, about 50/50 in stocks and “safer” investments like bonds, money markets and stable-value funds. Your return percentage may decrease, but it’s a bit safer. You can start withdrawing from your 401(k) at age 59 1/2.
3. Close to retirement — if you plan to retire within 5 years, rebalance your portfolio toward bonds, money markets and stable-value funds. Reduce your risk, because you could wind up with a lot less cash for retirement if another recession hits right before intend you retire. Aim for 30% stocks in your portfolio — or even less.
4. Remember Enron — don’t put all your eggs in one basket (or in one stock, such as your company stock). Diversification is key.
5. Always get the company match. If your employer will match up to 5% of your income (or perhaps 50 cents of every dollar you put in), then invest at least 5% of your income in your 401(k). It would be stupid not to — it’s like free money!
All in all, a 401(k) is still an excellent way to save for retirement. The stock market will always have its ups and downs, so determine what your personal risk level is and allocate your contributions accordingly so your portfolio fits your needs.