|
Everyone should have a sound plan for achieving
their retirement goals. If you don’t know how much money you need for
retirement, you can’t possibly know how much to save or how to invest
it. And, when times are tough, your plan will help you evaluate the
damage to your portfolio.
Keep making regular contributions and increase them if you can.
Employer matches come in a wide variety
of options depending on the employer’s discretion. Some employers
match contributions dollar for
dollar. Others match 25 or more cents on the dollar. That means each
time you contribute, your employer
adds money, for free! Often times your employer will only match up to
a certain percent of your salary. But
regardless, they’re adding to your retirement for you!
The worst time to stop contributing to your 401(k) is when the market is
down. Think about it. When the price of gas falls, do you stop filling
up your car? No. If anything, you fill up more often before prices go
back up.
The same principle applies to your 401(k). You want to keep adding to
your investments (and buy more if you can) while they’re selling at a
discount. Lower prices mean you can buy more shares with the same
contribution. This lowers your average cost basis and sets you up for
bigger returns when the market recovers and trust me, it will recover.
Review your asset allocation.
The foundation of your retirement plan is your asset allocation
strategy. This is the optimal mix of stocks, bonds, and cash for your
portfolio. The right mix for you depends on your specific goals, time
horizon, and tolerance for risk. Research shows more than 90% of your
long-term investment returns are determined by your asset allocation.
Right now is a critical time to review your asset allocation. While
your gut’s saying sell out of stocks entirely, your asset allocation
might say to buy more. Following a sound asset allocation strategy
will bring discipline to your decision-making and better long-term
returns.
Diversify your investments and keep costs down.
As the old saying goes, “don’t put all your eggs in one basket.”
Spread your investments across several different mutual funds.
Diversify by size of company through large-cap, mid-cap, and small-cap
stock funds. Get exposure to both growth and value investment styles.
And, don’t forget to include an international fund.
Keep your costs down by selecting funds with lower expense ratios. The
expense ratio pays for management fees and marketing costs. Don’t give
away more of your money than you have to.
In these tough economic times, the temptation to borrow from your 401(k)
can be overwhelming. My advice is to first exhaust all other options.
And, make sure the purpose of the money is important enough to justify
raiding your retirement plan.
Consider the consequences of taking the loan. Every dollar you take
out of your plan is one less dollar providing tax-deferred growth. If
you fail to repay the loan or make the scheduled interest payments,
the loan could be treated as taxable income. And, some plans require
borrowers to suspend making contributions to their plan for a period
of time |
