Question Of The Month November - 2009

Do You OR Don’t You Participate in Your 401(k) Plan?

Participate.  Most do but about 30 percent of eligible 401(k) participants never sign up --- about fifty percent of those under age 30 don't participate.  And those that do, typically don't put enough into their account.

Ø  How Much Should You Save?  No hard rule here --- but many planners say you should save at least 10 - 15% of your gross salary (including any employer contributions) beginning early in your career, in order to replace at least 50 of your salary in retirement. 

Ø  Take advantage of your employers “match.”  If you can’t contribute the match, participate at the level that takes advantage of your organization’s “match.”  If you don’t, you leave “free money” on the table. But, aim higher.  In 2005, only one in three contributed only enough to obtain the company match. 

Ø  Begin Early.  In your 20’s and 30’s retirement may seem like a lifetime away.  But, starting early can mean a bigger payoff later.  An extra year or two or three enables compounding to work its “magic.”

Ø  Have Realistic Expectations.  What is a reasonable return?  In the 1990s, some investors assumed that a return or 20% or more was realistic.  Unfortunately, for them, the average long-term return for the past 75 - 100 years is 9 - 11%.  Keep your expectations in line with long-term historical returns.

Don’t’s

Ø  Chase Performance. Even though this appears to be one of the most popular decision by investors, don’t pick a fund just because it has the highest rate of return during the past 3, 6 months, a year or two.  Choose funds on the basis of solid long-term performance, low cost and fees, and how they fit into your investment plan.

Ø  Avoid Loans:  A survey from Transamerica found that 18% of workers took out loans in 2007.  Looking at the funds in your 401(k) is understandable.  But, when you take out that loan, the experts will tell you to that you are borrowing from your retirement.  They say that you should keep those funds in your account and let compounding of your returns help you to build that nest egg. 

Ø   Don’t--- Cash out when you change employers.  It’s tempting to use that money.  A survey by Hewitt Associates found that nearly half of the 200,000 surveyed elected to take a cash distribution when they left their jobs.  Big mistake!!! Withdrawing your money now from your 401(k) will mean that you won’t have it when you will need it later.  And you may have to pay penalties and taxes to Uncle Sam.  Avoid paying those penalties and taxes by rolling it over to an IRA, transfer the balance to your new employer, leave the money in your previous employer’s plan.