Ask the Dollar Diva By Dorothy Rosen • Bankrate.com

Should I pull out of my 401(k) plan?

Dear Dollar Diva,
I am a 47-year-old single male making $60,000 a year. I currently invest eight percent of my earnings in a 401(k) plan, with no matching employer contributions. I have about $15,000 sitting in a bank earning a low interest rate.

I'm starting to think about retirement, but as a "rookie" investor, I'm not sure what to do. Should I pull out of my company 401(k) plan and invest these funds in a more profitable area? What should I do with my $15,000 to contribute to my retirement well being?

Dave

The Diva doesn't know what investments your 401(k) offers, but unless it's shares in the Brooklyn Bridge, pulling out in search of making a killing outside the plan is probably not a good idea.

Assuming you're in the 28 percent tax bracket, your eight-percent 401(k) contribution puts $4,800 to work for you. Yet it only costs $3,456 because you're investing with before-tax dollars (see the chart below for details). And the earnings compound year after year, tax free, sweetening the pot. No taxes are due until you start making withdrawals at retirement. You've got another 36 years on this side of the sod; that's a long stretch before taxes will be due on the tail end of your retirement savings.

Usually, your best bet is to contribute the maximum to your 401(k), so rather than pulling out this year, the Diva recommends that you think about increasing your percentage.

Asset allocation

Asset allocation is a key step to getting the most out of your 401(k) plan, so decide on an allocation you want to stay with for the next couple of years.

At the end of each year, the allocation percentages will change because the different funds will move at different rates. The following table illustrates an allocation among five fund categories at the beginning of the year and the end of the year.

In this example, the growth and income fund dropped from a desired 45 percent of the total portfolio to 35 percent. The small-cap allocation doubled from a desired 10 percent to a whopping 20 percent. To adjust next year, you'd allocate more dollars to the growth and income fund and less to the small-cap fund. How much depends on your contributions and the total amount in the fund.

Like any equilibrium position, a desired asset allocation is an ideal; something to strive for. So don't expect to hit a bull's-eye when you tweak your allocations each year. Here's what you want to remember: with this system your dollars buy more shares in the fund that's down because its share price is down; when the fund turns around, you really enjoy the ride because you only paid a little for a lot of shares. You're buying low, and that's a good strategy.

Savings

Unless there's other cash that the Diva doesn't know about, your $15,000 in savings is just right to cover emergencies such as an extended period of unemployment, or other unexpected crisis. If you don't expect to need this money soon, consider buying a couple of U.S. Series I Saving bonds. The current rate is 7.49 percent, and they're adjusted for inflation every 6 months. You must hold them for at least six months, and if you sell them before 5 years, you forfeit the last 3 months interest. At 7.49 percent, 3 months interest is under 2 percent.

DOROTHY ROSEN has a master's degree in finance, with a specialization in accounting, from the Kellogg Graduate School at Northwestern University in Evanston, Ill. Rosen has more than 15 years of experience in the financial arena, serving in Illinois and Florida as a certified public accountant, financial consultant, expert witness and educator. She is owner of Dorothy Rosen, CPA, a public accounting firm that serves individuals and small businesses.