MIDYEAR REVIEW OF INVESTMENTS AND PERSONAL FINANCE : Midyear a Good Time to Re-Evaluate 401(k), Retirement Planning
It’s midyear on Wall Street, a good time to rethink your investment moves and rebalance your asset mix.
Any review should include what you’ve stashed away in employer-sponsored retirement programs, such as 401(k) plans and their offshoots. It’s easy to forget about these accounts because you don’t see the cash--it gets pulled from your paycheck and invested on your behalf.
Besides, retirement planning is a long-term exercise, so there’s little need to follow your progress on a daily or weekly basis.
But tune in periodically, because a strong surge like this year’s stock market rally could throw your asset-allocation percentages out of whack. In addition, retirement plans are adding new bells and whistles all the time that may require your continued attention.
“I’d look at a portfolio every six months, make sure it’s in line with your retirement plan and make only marginal changes from time to time,” says David Hughes, director of institutional marketing at Twentieth Century Mutual Funds in Kansas City, Mo.
Here are some questions to guide your thinking for a midyear 401(k) check under the hood:
* Do you have a suitable mix of investments given your risk tolerance, time till retirement and other factors?
Experts suggest you focus on stock market investments in retirement accounts because of their superior long-run potential. As a rough rule of thumb, subtract your age from 100 or 125, and place that percentage of your portfolio into stocks.
If you’re 50, for example, put 50% to 75% of your account in equities. Consider diversifying among different types of funds, such as those targeting small stocks and foreign companies.
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Although experts worry that employees are putting too much money in bonds instead of stocks, 401(k) investors have been raising their stakes in stock mutual funds in recent years.
* Are you investing too much in the common stock of your employer? It’s fine to be loyal to your company, but it isn’t wise to hold your firm’s shares inside a 401(k) plan.
Doing so stakes your retirement on the fortunes of a single company--a company you are already tied to in other ways. Besides, individual stocks generally are tax-efficient anyway--you don’t trigger capital gains until you sell--and thus don’t need to be held inside 401(k) accounts.
Yet in a late 1994 survey, Access Research of Windsor, Conn., found that 23% of 401(k) money remains invested in the stock of employers. That compares to 32% in stable-value investments such as guaranteed investment contracts or money funds, only 19% in other stocks and stock funds, 14% in balanced portfolios, 7% in bonds and bond funds and 5% in other assets.
* Are you switching among funds too frequently?
As 401(k) plans grow more popular, many are coming out with expanded lists of investments. Suppose your employer signs up for the ChoiceMaster plan from First Interstate Bank. As a participant, you could apportion your 401(k) money among more than 200 funds from 16 families, including Fidelity Advisor, Franklin/Templeton, Janus and Scudder. Plus, you could shuttle cash among funds 24 hours a day through a toll-free number.
Such broad choices open possibilities for fine-tuning a 401(k) portfolio that were unthinkable a few years ago. But they also sow the seeds of confusion among some investors.
“The more choices you give people, the more complicated you make it,” says Wayne Woodman of Tower Asset Management, a Beverly Hills advisory firm that counsels 401(k) participants. He recommends changing your retirement mix no more often than once a quarter, and preferably every six months.
* Are you taking maximum advantage of a 401(k) plan, with the highest possible percentage contribution?
These programs offer three tantalizing benefits. First, you don’t pay current income taxes on the cash you sock away. Second, your investments grow tax-deferred until withdrawn. Third, your employer might put in money on your behalf.
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But even if your firm won’t pony up cash for you, a 401(k) could still prove attractive based on the other benefits.
* Are you too eager to pull money from your 401(k)?
Many plans allow you to tap into your nest egg well before retirement age by borrowing against your account’s value on a tax- and penalty-free basis. In fact, workers are more likely to participate in plans that sanction loans, says Access Research.
Yet it’s best not to utilize this option, so that your nest egg can grow undisturbed. Note: If you borrowed cash at the start of 1995, you have missed out on the huge rallies in stocks and bonds. Market surges don’t happen frequently and they don’t last long, so you don’t want your money to be out on loan when opportunity knocks.
