Three Ideas to Safeguard Your Retirement Plan
March 24, 2010 | By Steven DiGregorio
If you don’t want to open your 401(k) statement, you’re not alone. But not paying attention to your retirement plan now will come back to haunt you later. Take these three steps to build a solid plan to ensure security in retirement.
1. Determine your contribution amount
At Compass Asset Management Group, we believe that the amount you need to contribute to your 401(k) or 403(b) plan should be guided based on your age.
If you are in your 20s, it should be at least 10 percent of income. If you’re in your 30s, 15 percent. If you’re 40-plus, 20 percent. Workers in their 40s who haven’t saved before should save the maximum, which is now $16,500 per year. For workers 50 and older, the limit is $22,000.
If your company matches, you should include that in your calculations. For example, if you’re in your 20s and your employer matches 3 percent, then you should be saving 7 percent, for a total of 10 percent.
The biggest mistake made concerning 401(k) contributions? The employee’s withholding is incorrect. When you get the job and you’re not sure what to put down for withholding, you put down zero and it never gets changed.
Instead, adjust your withholding to accurately reflect your tax liability, then put the extra money that would end up in your paycheck in your 401(k) instead. Don’t get the money as a tax refund and blow it at Disneyland
2. Choose appropriate funds
Confused by all the offerings in your 401(k)? You’re not alone. Many 401(s) plans offer more than the average participant can reasonably choose from, the national average number of options is 17.
While the offerings are frequently skewed in favor of equities, bond funds should be included in your allocation. But how much? A general rule of thumb is to subtract your age from 100 and invest that much in stock funds. For example, if you’re in your 20s, about 80 percent of your 401(k) assets should be in equities and 20 percent in fixed income. When you’re in your 30s, it should be about 70 percent stocks and 30 percent bonds, etc.
You also need to understand certain things about yourself. How comfortable are you with seeing your account balance move up and down? Less risk tolerance means you may wish to allocate more to bonds.
At Compass Asset Management Group, we generally recommend a participants choose at least four options: large, midsize and small-cap fund, as well as a bond fund. If you have a company stock option, that should be no more than 10 percent of the portfolio. It might also be a good idea to get some exposure outside the U.S. by investing in a foreign stock fund.
In recent years, employers increasingly have included target-date funds in their lineups. These are one-fund solutions to the asset-allocation quandary that novice investors face. As a rule, you sacrifice some return due to the higher costs of this option.
3. Rebalance as needed
Once you make your fund selections, you can coast along. But you do need to do an occasional tuneup. If you don’t go back to those options and revisit them, the market will rebalance your portfolio for you, and not always in ways that you’d like.
Look at your 401(k) every quarter, and rebalance it once every year. Reduce your winning investments to an appropriate proportion of your overall portfolio. That strategy is known as buying low and selling high.
We recommend to invest outside of your retirement plan options with after tax dollars as well. This extra discretionary investment will allow you to do more of the things you want to do in retirement — the trips, spoiling the grandchildren. In most cases, you can’t save enough in a 401(k) to have as much as you need in retirement because limits are too low.
Another consideration if you don’t want to pay tax on investment earnings every year to Uncle Sam: Invest in a Roth IRA.
The most important things? Don’t wait until you’re 50, find out that you won’t have enough and panic. Start thinking about it earlier by assessing your future income needs, and you’ll have a much better chance of enjoying a happy retirement.
For more information contact us at 845.563.0537 or Contact@CompassAMG.com
The author of this blog, Steven M DiGregorio is President of Compass Asset Management Group, LLC and an Investment Advisor Representative with Spire Wealth Management, LLC a Federally Registered Investment Advisory Firm. Securities offered through an affilliated company Spire Securities, LLC a Registered Broker/Dealer and member FINRA/SIPC.
Tags: 401(k), 403(b), 457, bonds, financial planning, investing, IRA, mutual funds, pension, retirement, retirement income, retirement plan, Retirement Planning, Rollover, rollover IRA, ROTH, stocks
