If you have a 401(k) then it is highly likely that you have seen your balance sheet diminish drastically since the economic downturn that began in earnest in 2008. The last four years have been difficult, to say the least, for these plans, and now many are wondering if it is possible to stabilize their 401(k), and then rebuild it altogether?
There is no one answer to these two questions as a 40 year old will require a radically different plan than someone in their 60’s that is nearing retirement. In the past, younger investors were encouraged to be aggressive in contributing to their 401(k)’s while those within 10 years of retirement were often counseled to be conservative. Now, because of reduced savings to no fault of their own, those nearing retirement are being told to be aggressive, once again, in hopes of meeting their retirement goals.
Pensions Are Gone – Financial Security for Retirement is Now Your Responsibility
As pensions began to be phased out of most companies beginning in the 1990’s, many turned to 401(k)’s to provide savings opportunities for their employees, which allowed them to become more directly involved in their retirement security. With this in mind, President Bush signed the Worker, Retiree, and Employer recovery Act in 2008. It was primarily designed to prevent most companies from reducing their pension contributions, or, quitting them entirely.
The act also included provisions for single-employer pension plans, while suspending penalties for those over 70 ½ who may otherwise have been making the requisite contributions but were no longer able or willing. The Act has been relatively ineffective in the first part as most companies today have done away with pensions totally.
History tells us that the economy will rebound, and with that, investment returns should improve in time. But, in spite of this hope, many investors do not have the time or capacity to wade through tax laws, legislation, and the markets, so as to take control of their 401(k) and stabilize it, and then get it growing again.
Seeking Wisdom from Professional Investment Partners
As a result, more people than ever are turning to a Certified Financial Planner (CFP) like Matt to assist them in rebuilding their 401(k) to take advantage of current opportunities now available. It does take nerves of steel to embrace this and look forward, but what else is a person going to do?
Investment advice is as easy to find as clouds in the Montana sky. When the money being spoken of is not theirs, it is easy for financial advisers to be hypothetical, or to suggest one get involved in sub-prime mortgage investments and real estate, as occurred up through 2008. Those who offered such advice were near-sighted at best, but worse, undisciplined and lazy who went for the quick buck instead of the enduring one.
Alternatively, those who were diligent in their research and disciplined, were able to minimize the huge reductions many experienced, and are as likely to help one rebuild their nest egg for that approaching retirement day.
Five Simple Ways to Take Control of Your 401(k) and Rebuild It
1) Matching Contributions – If your employer matches your contribution equal to what you put in, you immediately have a 100% return. This should not be ignored in any age or economic environment. If you do not put into your account, then your employer will not either. Not all companies match your contribution at the same rate, and, some companies quit contributing once you hit a certain percentage of your annual earnings, typically at 5-6%. Understand what your company actually does so you can make the best choices for your plan and budget.
2) Leave your 401(k) Alone – Many individuals and families have been devastated by the reduction in their account, and are desperate for money. Some have lost jobs, or have expenses that may cause them to consider dipping into their 401(k). But, unless you are about to lose your home, or have astronomical medical bills, it is advisable to leave your 401(k) alone. While it is tempting, rebuilding it will take longer and may make a full recovery impossible. Do not treat your 401(k) like an ATM. You must have nerves of steel.
3) Balanced Portfolio – Each person has their own goals, often dictated by their wealth, or lack thereof, and, therefore, approaches investing differently. However, regardless of one’s net worth, all investors should have a balanced portfolio that does not rely too heavily on one market sector, regardless of the potential and proof of its returns. An all “eggs-in-one-basket” approach is unwise. Many companies have quarterly rebalancing programs that allow their employees to make changes in their investments. Discuss the benefit of stocks and their ability to hedge against inflation with your CFP, while considering other avenues that you may have overlooked.
4) Be Patient – As stated above, history tells us that the markets will bounce back. Anxiety is understandable, but be hopeful and continue contributing to your 401(k), taking every advantage allowable by law and your company. Even if you have to roll over your 401(k) due to a job change, which is typically an advisable proposition, do not use that as an opportunity to withdraw money. Again, one must have nerves of steel.
5) Hire a CFP – Unlike your company’s 401(k) manager, a CFP will sit down with you to take a 360 degree view of your personal, family, and retirement goals, in addition to your finances, and will then create a comprehensive plan to help you achieve them. Unless one is wholly qualified to do this on their own, a CFP will help you understand what you need to save, how ambitious or conservative your savings must be, what other types of retirement accounts you should have, examine your mortgage to see if it is the best for you, discuss insurances to identify the best coverage’s at the lowest costs, help you create an emergency fund so other investment are not harmed, clarify and help you take advantage of tax issues, and what kind of investment vehicles you will need to engage in at what expected rate of return to help you achieve your retirement and savings goals. Plus, they will make you aware of the investment fees they require to assist you in achieving your goals.
Even if you do not have nerves of steel, a CFP will. Following these simple investing guidelines will help you stabilize, and, hopefully, recover what you lost in the last few years.
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