Tweak Your Dollars With Market Maneuvers
If this year’s up-and-down stock market has you feeling uncertain about your 401(k) or IRA — and wondering what you should be doing with it — you’re not alone.
“Huge swings in the stock market are nerve-rattling because they’re a powerful force we can’t control, but rather than reacting to market moves impulsively, it’s important to have a well-formed strategy that’s focused on your goals for the future and not on what Wall Street did yesterday or today.” USAA’s Scott Halliwell
To help build a strategy for a 401(k) or IRA retirement saving plan, follow these six basic guidelines.
1. Stop trying to outsmart the market.
When people try to guess what the market’s going to do next, they often become their own worst enemies.
Want proof? In the first quarter of 2009 — some of the darkest days of the financial crisis that kicked off this era of lingering uncertainty — Americans pulled more than $1 billion from investment options that held stocks, according to a survey by global human resources firm Aon Hewitt. U.S. stocks bottomed March 9, 2009, and soared 64% over the rest of the year — which means many of those people locked in their losses and then missed one of the biggest rallies of the past century.
2. Make sure you have the right mix.
Some investors may have fled stocks because they didn’t realize just how much risk they were taking — until it was too late.
While stocks historically have offered attractive long-term returns, they also expose you to the risk of big declines, especially over shorter time periods. That’s why it’s important to allocate your money across different types of investments.
Building a diversified portfolio can be much easier than you think, especially if your retirement plan offers target retirement funds. They’re customized based on your planned retirement date. You pick the 401(k) or IRA plan fund that’s closest to your planned retirement, and the fund manager creates a diversified portfolio that becomes more conservative as your target gets closer.
3. Don’t lose your balance.
Over time, your portfolio may start to drift away from its original mix. It’s inevitable as the investments that make up your portfolio grow and shrink at different paces.
Let’s say you put 50% of your portfolio in stocks and 50% in bonds. Next, let’s assume that, over the next year, your stock funds grow by 15% while your bond funds lose 5%. You’d now have a portfolio that’s 55% stocks and 45% bonds.
To keep your portfolio aligned with your appetite for risk, it’s important to review and possibly reset your investment mix at least once a year. It’s called rebalancing, and about half of all 401(k) plans can do it for you automatically, according to Aon Hewitt.
4. Pump up the volume.
When it comes to saving for retirement, Americans often think their success depends entirely on the economy and the markets. They forget that they control the most important variable of all: how much they’re saving.
The great thing about employer savings plans is that the money gets put to work before we ever get our hands on it. Increase your contribution rate to the highest level you think you can possibly manage, and you might be surprised how little you miss the money. At a minimum, consider contributing enough to get your employer’s full match.
5. Bring it all together.
If you’ve changed jobs a few times in your career, chances are you’ve got some unfinished business. You need to decide what to do with the money sitting in your former employers’ 401(k) plans.
You can tie up those loose ends by moving your money to an IRA in a tax-free move called a rollover. Consolidating your money with rollovers can simplify your life and give you access to more investment options.
Plus, if building Roth IRA assets is on your to-do list, converting your old accounts to a Roth IRA is one way to make this happen. You simply need to direct your former plan sponsor to roll the funds into an existing or new Roth IRA account. Be aware that a rollover to a traditional IRA is tax-free, while a rollover to a Roth IRA is a taxable event. However, you may be able to lighten the tax burden if your accounts are down in value when you convert.
It also is possible to roll your old 401(k) or IRA plans into your current plan in many cases. While using this strategy can help bring your funds together, you will be limited to the investment choices of your current plan.
6. Turn it into income.
If you’re close to retirement, you face an intimidating challenge: figuring out how to make that money last the rest of your lifetime. An annuity lets you exchange some of your savings for an income that’s guaranteed to last your entire lifetime. At a time when employer pension plans are becoming rare, annuities give retirees a do-it-yourself option.