People in Finance: 401Ks

  If you’re like most Americans these days, you cringe at the sight of that 401k envelope in the mail that dutifully reports the quarterly progress, or lack thereof, of your retirement account. And perhaps many of you wonder whether there’s anything that can be done to ease those painful minus signs near your bottom line. We asked three financial advisers if it makes sense to re-think 401k strategy in light of the recession.

Tim Halls, principal, Moneta Group

    If you’re in the accumulation phase (30s, 40s, even 50s), what is happening right now is manna from heaven. Investments go on sale about once every five years, this is the sale of sales. If you have a diversified portfolio, this is an amazing time to stock up on future profits. It doesn’t really matter if the market is going to go down more, 30 or 40 years from now, you’ll be delighted with the windfall.

    Your strategy should be based on personal goals and objectives, not a response to the market. If I’m 50 years old, and my strategy is half in stocks and half in bonds, my stocks probably have gone way down over the past year and a half. My portfolio probably doesn’t look 50-50. So I need to re-balance: take money from bonds and buy more stock. At some point, stocks will begin to do well. What most people want to do is sell their stocks when they’re way down. But if you think about it, that doesn’t make sense. If you have a diversified portfolio, re-balancing is a great way to take advantage of that. If you do that over the long term, you’re going to be in great shape.

    If you’re 62 and getting ready to retire, and have a bunch of money in stocks that are way down, obviously, the horse is out of the barn. You probably shouldn’t have had that much money in stocks if you’re getting close to retirement. Don’t compound the problem by selling low. Do whatever you need to wait out the recovery of the stock market. Think about postponing your retirement, or cutting back on retirement spending the first couple of years. It’s going to be hard, but it can be done.

    For people who’ve lost their jobs and are really in a crisis situation, there’s just no choice but to drastically change spending habits. The younger you are, the more damaging it is to your retirement savings if you withdraw money from your 401k. That money, if you compound it over 20, 30, 40 years, is huge. And, most people who withdraw don’t replace it. So if you’re making discretionary choices about where to find money, getting it out of the 401k should be on the bottom of the list.

David Presson, director of investment services, First Bank

    Most studies have shown that around 90 percent of your return in your portfolio is determined by your asset allocation strategy: how much you allocate in stocks vs. bonds vs. cash, and in long-term vs. short-term bonds. Very little is gained in trying to time the market. Determine the right mix for you, and once you have it, stick to it. According to your target allocation, you may need to re-balance once a year.

    When you get your statement, relax. Don’t do anything rash. Look at where it outlines exactly what your investment objectives are. Remember to stick to that plan. Sometimes the best course of action is to do nothing. If you have a well thought-out, solid plan, you should be OK.

    If you have more than 10 years to go before retirement, the majority of your portfolio should be in stocks. Stocks can be risky over a short period of time, but over longer periods, there have been very few instances where investors lost money in stocks. Over the last few years, stocks have generated the best return over inflation next to other investments.

    One of the most common mistakes is that people are too conservative. If you don’t have enough exposure to stocks, you run the risk of not keeping up with inflation. On the other side of the coin, some people are too aggressive, and then when the market goes bad, they panic and never recover. Strike the right balance. Diversify.

Jackie Yoon, financial adviser, Wells Fargo Advisors (formerly Wachovia Securities)

    The biggest advantage people in their 20s and 30s have is the luxury of time. But it also poses a big challenge because of the mortgage, young kids, day care expenses, etc. Since they have less disposable income, they should shoot for putting at least 10 percent or more of their paychecks into their 401ks.

    For people in their 40s and 50s, the house is usually paid off and the kids are in college, so they have more disposable income. They should really boost their contribution up to 20 percent. The maximum yearly contribution you can make to your 401k is $16,500. Any time you’re able to do that, you should.

    If you’re approaching retirement, how you invest those last 10 years before you retire is going to make a difference. The reason a lot of these plans fail is because people keep making changes. That’s not prudent investing. Stick to the plan you have.

    Because of all the information available to us, in the news or online, people panic and cash everything out. They think to themselves, I’ll sell everything and get back in when everyone else does. Well, if everyone does that, it hurts the market. The future and the commerce of the market depend on each of us making an investment in it. Don’t go into panic mode and react with emotion. Remind yourself, I have a plan.