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5 ways to get more from a 401(k)

By Jennie L. Phipps ·
Sunday, May 15, 2011
Posted: 12 pm ET

For most of us, money saved in a 401(k) will provide a big portion of our retirement income.

The Employee Benefit Research Institute (EBRI), a nonprofit think tank funded by financial services companies, held a seminar last week on the question, "Is There a Future for Retirement?" Much of the discussion centered on how to shore up 401(k) savings plans to help workers save at least enough to replace 50 percent of their income at retirement.

Here are five of the retirement planning suggestions made by speakers at the conference that all of us can do without any help from our employers.

  1. Save at least 10 percent of your salary. If you think that's too much, then start with a minimum of 6 percent and build up 1 percent per year until you get to 10 percent. If you can manage it, saving 15 percent of salary improves the chance of a comfortable retirement significantly.
  2. Diversify your investments. Investment gurus are saying that the "new normal" return on stocks covered by the S&P is 6.5 percent, down from a 9 percent average over the last century. Instead of putting all your money in U.S. equities, consider upping your return by adding commodities, REITs and global bonds to your savings strategy. Balance the added risk with some TIPs -- U.S. bonds that pay more when inflation rates rise.
  3. Don't take your money out of your 401(k). The odds of successfully saving enough money for retiring drop exponentially when people don't save steadily throughout their working lives. If you have a financial crisis, borrowing isn't so bad. Loans from 401(k)s have gotten a bad rap, but research presented at the conference showed that borrowing money from a 401(k) and paying it back has almost no impact on the total available at retirement, while permanently taking money out devastates success rates.
  4. Get expert help. Every 401(k) plan is different and so is everyone's personal situation. One of the EBRI gurus said facetiously that retirement planning is so complicated these days that each of us needs our own personal actuary to help us devise a plan. Obviously, that won't work, but it suggests that it's wise to get some expert help while there's still time to make corrections.
  5. Avoid poor health and debt. These are the two big factors that increase the amount of money that people need for retirement and also keep them from saving enough before retirement. So exercise, watch your weight and keep your credit cards in your pocket.
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May 16, 2011 at 1:46 pm

Troy - Go to your employer or plan sponsor and discuss this with them. If seems strange to me.

Scott - I wouldn't encourage the typical 401k investor to time the market as you have suggested. Also, returns are net of fees. I rather be in an overperforming boutique mutual fund than an index S&P. Also, for most people a 401k has an instant return due to tax savings of their tax rate. A roth doesn't, regardless of fund choices and a traditional depends on your overall tax position with a much smaller tax savings "match".

Jennie - On #5, I agree from a moral position, but recent studies show that the unhealthy people tend to get diseases earlier and drop dead earlier so their retirement need is much keep on smoking. 😉 However, I rather make the bet of a healthier life in early/pre-retirement than worry about medical expenses in early/pre-retirement to where retirement is nonexistant. I will buy a long term care policy when I hit 55 and call it a day.

May 15, 2011 at 11:42 pm

I have a different opinion than the author on diversification advice. TIPS currently are a guaranteed way to lose money these days since the interest payout is too low. We have to remember that the government skews the data so your food costs, gasoline costs, college costs, and health costs are excluded from their inflation statistics. So I think telling people that TIPS are a good investment is bad advice. People have been crying wolf about inflation since the mid-1980s. The wolf does exist, but he is not out of the woods yet. Likewise, many of the target date funds in 401k plans are not as risk free and omnipresent as they would claim to be. Stocks will continue to perform over the long haul. They will nominally outperform bonds given the Federal Reserve has rates close to 0% and bonds tend to lose money as interest rates rise, which is likely to happen within the next 5 years. So a decent portfolio should probably contain less bonds than under normal conditions. Buy corporate and junk bonds since the yield on Treasuries is not worth the risk of the U.S. government default that some Republicans are clamoring for and the artificially low yield stinks. For stocks, don't just buy the S&P 500. The Russell 2000, medium cap, and small cap stocks all tend to outperform the S&P 500. These days diversification means owning stocks in multiple capitalization ranges and using stocks with decent dividend yields as a substitute for bonds. Most 401k plans I have seen only pay lip service to diversification. Most corporations do not care about the 401k plan they offer to you. They only offer it because they are afraid people will quit and work elsewhere if they don't offer a 401k plan. If you are uncertain about what direction the economy is heading, it is okay to sell and move to a portfolio that has more cash for 6 months or a year. After all, the idea is to buy low and sell high. You don't need immediately buy something after you sold something. Also, pay attention to the fees. Many index and mutual funds only perform well when their fees are low or reasonable (i.e. below 0.6% and below 1.2% respectively). If you don't like your company's 401k plan, invest in a regular or roth ira instead first amongst existing investment vehicles.

May 15, 2011 at 8:02 pm

My 401k plan has mostly equity heavy funds, 2 large caps ,2 growth fund and 2 bond funds at a total of 16 funds. After reading your analysis above what is a person like myself to do when 80% of the offering is only equity or what the risk prospectus reports as moderate to very high?