By John Persinos
As the grandfather of toddler twin boys, my mind increasingly turns to the financial security of my supposed golden years. I'm still several years from retirement, but the older (and greyer) I get, the weightier my personal investment decisions.
Consider the rise of stocks this year. We've been enjoying a nice rally but bull markets don't last forever.
It can take years to recover from a significant stock market downturn. As you age, the less time you have to bounce back. It's crucial to create the right allocations, based on your stage of life and current market conditions. Which brings me to your 401k plan. You can't just put it on automatic pilot.
The SECURE Act...
The need to optimize your 401k plan got even more urgent this week. The Senate on Thursday passed the most significant changes to the nation's retirement system in more than a decade. The U.S. House passed the bill on May 23.
Called the Setting Every Community Up for Retirement Enhancement (SECURE) Act, the legislation is designed to get Americans to save more. President Trump is expected to sign the measure into law.
As we get ready to start a new decade, the SECURE Act is a reminder that you should take a hard look at your 401k to get the most out of it.
One key provision of the legislation passed yesterday by the Senate encourages 401k plans to mimic a feature of conventional pensions by offering products with guaranteed income payments.
Are you making the right investment moves for your retirement? Statistics show that most Americans will outlive their retirement savings.
According to a recent report from the World Economic Forum, American workers are woefully unprepared for retirement, with the average 65-year-old saving enough to cover less than a decade of costs.
The average U.S. man faces a savings gap of 8.3 years, while women, who live longer, face a gap of 10.9 years. The report found that the U.S. will have the world's largest savings shortfall at $137 trillion by 2050.
Among the letters that I get from readers, one recurring topic is 401k investing. Here's a recent email that I received and it's indicative of reader concerns:
"I really enjoy reading your column. What is a person to do when it comes to the allocations in their 401k? Mine is very limited in its choices of where I can put my money. We have mainly target date funds and two large-cap funds. I am thinking of moving my money into a stable growth or money market fund before or when the bottom drops out." - Tom M.
Today, I want to step back from the daily ups-and-downs of the markets and look at the big picture. I will address Tom's question, which has universal applicability for retirement investors. The investing rules that I convey below are timeless and apply regardless of tit-for-tat tariffs, economic cycles, or presidential tweets.
Your asset allocation dashboard…
I welcome all inquiries from readers, but securities law prevents me from offering individualized investment advice. I can say this, though: to make a 401k plan really worth it in your younger years, you must emphasize stock funds. 401k plans are long-term money and over the long term, stocks have outperformed every other investment vehicle.
If managed correctly, a 401k plan is the most powerful method of accumulating retirement assets over the long term. And stocks are the best long-term game in town.
Stocks have historically outpaced other types of investments because they provide the opportunity for growth. That's why 401k investors have an advantage-they can approach the stock market with an eye on the distant horizon.
I'd never advise putting all of your eggs in one basket. But the younger you are, the more heavily you should weigh your 401k portfolio toward stocks. If you're still several years away from retirement, the safer you play it, the less effective your 401k plan. Consider these three questions:
1) What's your stage of life?
| | | What to Do Before Stocks Sink 57% | | | | With the stock market hitting record highs, most people think we must be in pretty good shape. But hold on a minute... according to Yale professor Robert Shiller, stocks are 57% too high. That's 14,000+ points on the Dow. Shiller won a Nobel Prize for his work on stock prices. And if he's right, millions of investors could be about to see their investment accounts crushed. Don't let that happen to you… especially when it's so easy to avoid. | | | |
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For example: relative youth (aggressive growth); middle age (moderately aggressive); retirement in the next 10 years (income and moderately conservative); retired (stability and income).
There are several variations. Chose a category based not only on your approximate age, but also on your tolerance for risk. As long-term market history amply shows, you'll have to withstand a lot of bumps along the way.
One asset class appropriate for any stage of life are funds that contain utilities stocks.
Read This Story: The Recession-Resistant Power of Utilities
The utilities sector confers growth, safety and income, in good times or bad. For details on the money-making power of utilities, click here for our special report.
2) What's your risk tolerance?
If your 401k takes a sharp turn for the worse when you're in your 40s, you still have plenty of time to bounce back. But if your investments take a nosedive while you're, say 65, you're in a far worse predicament.
3) What are the regulatory requirements?
Don't be blindsided by unforeseen rules and regulations. For example, what are the mandatory distribution requirements for your 401k? Get the full list of rules and regs from your HR director.
Now, to address Tom's question about "target date" funds.
Many investors are becoming enamored with asset allocation mutual funds, also known as target date funds, which provide investors with portfolio allocations predicated on their age, risk tolerance and investment objectives. However, even this "solution" can be too standardized and doesn't address highly individual requirements.
According to the financial research firm Ibbotson Associates, about a half-trillion dollars are now invested in target date funds. These funds are typically issued in five-year increments - 2020, 2025, 2030, 2035, etc.
Target date funds are simple to use. You pick the fund closest to your retirement date, invest your money, and the fund manager calibrates the mix of stocks, bonds and cash to get more conservative over time. As the target date approaches, the fund's allocations get safer. The exposure to stocks is reduced as the allocations to bonds and cash increase.
The "target date" refers to the year you plan to retire. That's when you'll stop making contributions and can start withdrawing money.
Not all target date funds are the same; the specific approaches and investments depend on the fund you choose. It's a common myth to think that with a target date fund, one size fits all.
The following chart depicts a hypothetical target date fund:
Target date funds would seem to be the perfect solution to the challenge of asset allocation, but there are no panaceas when it comes to investing.
One problem with target date funds is that their allocations are based on past returns, without accounting for the current market environment. Many also entail high expense burdens.
There's no substitute for doing your own homework. As you determine asset allocation, stay focused on the long-term picture, not the market's quarter-to-quarter roller coaster rides. Put temporary market blips into perspective. Case in point: the market swooned in the fourth quarter of 2018 but it has since regained its losses and then some.
A final note, about 401k fees.
Do you know how much you're paying for your 401k? If you're like most people, the answer is no. According to one study, 401k fees were so high (compared with an index fund) in 16% of the plans that, for young employees, these fees consumed the tax benefit of investing in a 401k plan.
Most 401k plan participants aren't even aware that they're paying 401k fees, but many mutual fund providers charge more than 1% of your total assets in investment management fees.
To maximize your long-term wealth building strategy, you need to understand these fees and scrutinize your 401k plan packet for them.
Questions about your 401k? I'm here to help. Please note, I sometimes edit letters for the sake of concision and clarity: mailbag@investingdaily.com
John Persinos is the managing editor of Investing Daily.
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