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If your boss handed you an
envelope filled with cash, would you throw it away? Of
course not! But employees do it every day. And that’s not
the only mistake they make. I often come across investors
who have made simple, yet costly mistakes in their company
retirement accounts (401(k)s). If you or your spouse have a
401(k) account, read on to make sure you aren’t making the
same mistakes.
The most common mistake I find concerning a 401(k) is that
some workers don’t take advantage of it at all. This is
especially amazing when many employers match a portion of
their employees’ contributions. For instance, let’s say your
company matches your contributions dollar-for-dollar up to
3% of your salary. If you make $50,000 a year, that means
the company will put in $1,500 if you put in $1,500. That’s
a 100% return!
You should make these contributions even if you think you
can’t afford it. Most 401(k) plans allow you to borrow
against the balance of your account at a low interest rate.
So you get the company match and can still access the money
in an emergency. (Plans differ, so check the details.)
The second mistake I see people with 401(k)s make is
choosing the wrong investments for that money inside the
plan. Perhaps they’re very conservative and afraid of the
stock market, so they put 100% of their money in the fixed
account or a bond fund. What they don’t realize is that
those investments may not grow enough over time to outpace
inflation. Sure, the balance may continue to increase, but
the money will buy less when they take it out than when they
put it in!
Some with the wrong investments have what I call ‘misguided
loyalty’. These are the folks who have their entire 401(k)
in their company’s stock. Perhaps this started because their
contributions were only matched when the money went into
company stock. Others might feel pressure to be ‘loyal’ to
the company. In their minds, not having all their 401(k) in
company stock would be like saying they thought their
company was a bad investment.
I met a bank employee who had done just that. His 401(k) was
100% invested in his bank’s stock. When the stock took a hit
in the market, he lost half of its value. Now this ‘loyal’
employee has to put off retirement for several years to try
to make up for the loss.
If you’re one of the lucky ones whose firm matches
contributions into company stock dollar for dollar, by all
means take full advantage of it. But you don’t have to keep
your funds in the company stock forever. Every six months,
spread your money into several other baskets to keep your
portfolio better balanced.
The third mistake I see concerning 401(k) investments is
having the wrong diversification. Maybe you don’t have 100%
in bonds, but you still have the majority of the account in
them. You may have most of your money in aggressive stock
funds. Any time you’re too heavily weighted in one area,
it’s a problem.
Proper diversification isn’t that hard to achieve, but there
are a few guidelines to remember. While you do need some
bond exposure, don’t over do it. Bonds’ record-setting
performance of recent years isn’t likely to continue. When
it comes to equities, select more than one stock fund. Try
to spread your money between funds with stocks in large, mid
and small sized companies. And don’t forget to include some
international stocks as well.
For the next few years, I recommend those in their 40s put
20% into bonds and 80% into equities. For those in their
50s, 30% to 40% should be in bonds with the remainder in
equities. For those approaching retirement, remember that
you might need to use your nest egg for another 25 years or
more. You’ll still need growth, so don’t shortchange the
equity side.
401(k) programs have helped millions of workers achieve a
higher standard of living through a more secure retirement.
By taking full advantage of your 401(k) program and
investing your money wisely, you too can achieve your
retirement goals.
If you’d like free, clear, unbiased advice submit your
questions to www.guardingyourwealth.com/askjeff.htm.
Mr. Voudrie is a Certified Financial Planner, nationally
syndicated newspaper columnist and President of Legacy
Planning Group, Inc., a Private Wealth Management Firm in
Johnson City, TN. He can be reached toll-free at
1-877-827-1463.
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