Managing retirement savings in volatile markets |
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In tax-advantaged retirement accounts, the tax impact
of rebalancing is minimal. Consider rebalancing based on the asset
allocation of all your investments and look to minimize the tax
impact of changes by managing asset allocations across taxable and
tax-advantaged accounts. For example, you may want to keep investments
taxed at ordinary rates, such as certain bonds, in your retirement
account, while other investments taxed at favorable long-term capital
gains rates might be kept in your taxable account.
4. Consider investment choices
If you don't like the investment choices in your 401(k) or 403(b) plan, then work with your plan sponsor to change them. Plan sponsors are becoming increasingly receptive to feedback from participants.
Beyond choices, you also want to consider the annual fees and expenses associated with investing in the plan. Fees and expenses will always be part of the equation, but you don't want an excessive drag on your investment returns. In recent months, regulators have focused on the issue of plan fee disclosure due in part to the spate of lawsuits filed by plan participants.
5. Determine your risk tolerance
Know how you feel about risk in investing. The "Investment Risk Tolerance Quiz" offered by Rutgers' New Jersey Agricultural Experiment Station, can give you a quick read on your risk tolerance. It's a quantitative approach to the "sleep number" test discussed by David Stevens in the Bankrate feature, "8 tips for investing in hard times."
If you find yourself tossing and turning at night, and it's not your mattress but rather the markets keeping you awake, then it's time to dial down the risk of your portfolio.
If you're not willing to take on much risk, then you should expect to contribute a higher percentage of your income to your retirement investments. There's a trade-off between the willingness to accept risk in investing and the returns you can expect from investing. It's easy to focus on the safety of principal invested, but you have to also be concerned about earning a high enough return to have that principal's purchasing power increase with inflation. If your investments can't keep pace with inflation, then you will fall behind in meeting your retirement goals.
6. Limit company stock exposure
You already have your human capital invested at work. Be careful about doubling down and investing too much of your financial capital at work, too. If the matching contribution made by the company is in company stock, investigate your options in managing that exposure in your retirement account. Financial advisers commonly recommend that you hold no more than 10 percent to 15 percent of your retirement monies in company stock.
7. Don't dip into retirement accounts
Refrain from borrowing against your retirement accounts. If you
get laid off from your job, most plans require that a 401(k) or
403(b) loan immediately comes due. If it's not repaid, then it is
classified as a distribution and is taxable. You may also owe the
10 percent penalty tax on an early distribution.
Likewise, unless you're up against it, don't cash in your retirement accounts after a layoff. The distribution is taxable as ordinary income and you may owe a 10 percent penalty tax, as well. Try to keep this money working for you toward your retirement goal and don't let Uncle Sam get the money early.
8. Re-characterize Roth IRA conversions
If you converted a traditional IRA to a Roth IRA in 2008 only to
see the account decline in value in the 2008 tax year, you should
work with your tax adviser to determine if it makes financial sense
to re-characterize the account as a traditional IRA. You want to
look into this because the taxes due on the conversion are based
on valuations on the conversion date.
Why pay income tax on losses? You can look at reconverting in 2009. IRS Publication 590, "Individual Retirement Arrangements" has all the details, but avoid the temptation to do it yourself.
9. Get professional help
A professional financial adviser can help you understand what's going on in the markets and how the market sell-off may present opportunities for future growth.
No one knows for sure where the market is heading. You shouldn't look for guarantees, but a financial planner can help you manage the risk you face in your portfolio while helping you to identify and work toward your life goals -- including and especially retirement.
Whether you're wet behind the ears or a seasoned investor,
see Bankrate's age-specific
investment advice on how to deal with volatile markets.
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