Make Sure Your Retirement Plan Keeps Working
With US stock and bond markets climbing higher, it may be time to readjust your retirement plan, especially your contributory plan such as a 401(k) or 403(b) plan.Skip to next paragraph
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It's like tuning up a car or rebooting a computer suddenly gone awry.
But unlike getting a quickie-lube or pushing a button, rejigging your retirement plan requires some thought about long-term goals. Don't do it just because the stock market has gone topsy-turvy.
"It is always appropriate to see if your asset allocation plan [your particular mix of stocks, bonds and cash accounts] is in line with your long-range financial objectives, your risk level, and your investment time horizon," says Donald Johnson, an investment expert with the College for Financial Planning, in Denver.
"Your asset allocation is the key" to your long-range financial plan, says Professor Johnson.
You may re-allocate your funds based on changing circumstances, such as your stock portfolio becoming too large, because of the huge gains made in equities the last few years. But experts warn against changing your retirement portfolio based on market timing - seeking to profit based on the day-to-day gyrations of stocks.
According to the 401k Forum, an Internet site specializing in 401(k)/403(b) retirement issues (www.401kforum.com), 90 percent of total investment return comes from having the right investment mix, not from trying to time the market.
Set up an asset-allocation plan "that is right for your particular circumstances," Johnson says.
That does not mean that adjustments may not be in order due to sharp market swings, such as the downward drop in the main-market indexes from mid-July to late September.
"A lot of people were astounded at how uncomfortable they felt during that downturn," says Paula Hogan, who heads up Hogan Financial Planning, in Milwaukee.
That means they may have too much risk and might need to adjust accordingly. One rule of thumb calls for tailoring your investments so you can sleep at night.
For most investors, only some "small fiddling" seems in order right now, says Ms. Hogan. She likens the recent market turbulence to a "bad thunderstorm," but not a full-scale weather disaster.
What most investors fail to realize is that they have several options with their 401(k)/403(b) plans, experts say.
Example: One young woman, who works for a New York based retailer, says she didn't know that she could change the mix on her retirement accounts merely by calling an 800-number for the company at any hour of the day or night, and shifting her money around by pushing the buttons on the phone.
"I thought I had to go through a company representative, which I always dislike," she says.
Example: An employee of a publishing firm says she didn't realize she could call directly the companies offering mutual funds on her plan for changes in her account. She initially thought she had to use her firm's employee benefits department.
Say, for example, that you have a mutual fund account with XYZ Group, and that account contains $3,000, all in one equity fund which has been hard hit during the downturn.
By dialing XYZ's retirement department directly, you can switch your existing assets into different funds, including bond and money-market funds.
With some mutual-fund companies, you can have your current employee contribution go into one fund, and the employer contribution go into another fund.
There is usually no transaction fee for the exchange, or, at worst, only a small one. There could also be a redemption charge. You will need to check with your fund representative. But since qualified (that is, federally recognized) 401(k)/403(b) plans are tax-deferred (you pay taxes when you withdraw the money, presumably years from now) there are no immediate tax consequences in making a shift from one fund to another.