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Plan Insight

AUGUST 2010 Newsletter

The Four "R's" of the Mid-Year 401k Checkup Process

Recent market volatility has caused many 401k investors to wonder if their retirement savings are on track.  Consequently, plan service providers are encouraging people to perform a mid-year review of their 401k plan investments, and have outlined a simple process to help guide these reviews.

The halfway point for the year provides a good opportunity for 401k investors to assess their retirement savings plan, especially given the market turbulence we have experienced of late.  It's important to periodically check that your risk exposure, savings rate and plan investments continue to be in line with your overall retirement savings plan and goals.

401k investors should follow the four "R's" when conducting their mid-year 401k check-up:

·   Rebalance: Once you have established an asset allocation strategy for your 401k portfolio based on your retirement savings goals and time until retirement, review your account every so often to make sure allocations match their original targets. This can be particularly important if the stock market significantly rises or falls. For example, an investor with 60 percent of his assets in mutual funds that invest in stocks and 40 percent of his assets in mutual funds that invest in bonds will likely see the proportion of assets he has in stocks increase if the market were to increase 20 percent, making it a riskier account than it was originally designed to be.

401k investors can manually rebalance themselves or investigate whether their plan includes features that do it automatically, such as an automatic rebalancing tool or an appropriate target date retirement fund.

·   Risk: Determining the level of risk you're comfortable with can be difficult and is often most clearly revealed during times of market tumult.  If you can't sleep at night because you're worrying about your investments, then you're probably taking on too much risk.

However, determining the right level of risk for a 401k portfolio shouldn't be solely driven by whether big swings in the value of your portfolio disturb your rest; your capacity for risk matters as well.  Younger investors generally can afford to be more aggressive and take on more risk, because they have a bigger window of time to make up shorter term losses.

·   Review: 401k investors should also review the amount they are contributing into their plan, especially if they made the decision to lower their contribution rate or stopped contributing to their plan altogether over the past few years.  A good rule of thumb is to try saving at least enough to get the full benefit of any matching contribution your employer might make. Of course if you can afford to save more, that’s icing on the cake.

Annual salary increases or raises also present a good opportunity to boost 401k savings, because it gives you the opportunity to take home some of the additional income today while also putting additional savings away for your golden years. And, as with most of our 401k plans, people age 50 and older are permitted to make "catch-up" contributions.  In 2010, 401k investors eligible to make "catch-up" contributions can save up to an additional $5,500 above the standard limit of $16,500 – a total of $22,000 deducted from gross income contributed as a ‘pre-tax’ contribution.

·   Repeat: Staying invested and continuing to boost the amount you save is key to achieving your retirement savings goals, despite market ups and downs.  Remember, time in the market is more important than timing the market, and dipping in and out of a 401k is never a good strategy.

For example, during 2009, missing the best 10 days of the S&P 500 (that's 10 days out of 252 trading days) would have reduced your annual return from 26.5% to negative 17.5%. Missing the best 20 days would have pushed your annual return down to negative 38.4%.* Treat your 401k like a lockbox, to be opened only when you reach retirement, and resist the urge to withdraw from the account when times are tough.

* Source: Schwab Center for Financial Research with data provided by Standard and Poor's. Return data is annualized based on 252 trading days within a calendar year. The year begins on the first trading day in January and ends on the last trading day of December, and daily total returns were used. Returns assume reinvestment of dividends. When out of the market, cash is not invested. Market returns are represented by the S&P 500 Index which represents an index of widely traded stocks. Top days are defined as the best performing days of the S&P 500 during 2009. Indices are unmanaged, do not incur fees or expenses, and cannot be invested in directly. Past performance is no indication of future results.

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Information is provided for review and consideration only. Please consult legal and tax advisors for practical advice pertaining to your business and personal situations.

Material in our newsletter may have been extracted in whole or in part from the IRS Employee Plans publication, and the presence of IRS material does not constitute or imply the endorsement, recommendation, or favoring by the IRS of any opinions, products, or services offered by the sponsor of this web page or document.

This page was last reviewed and/or updated on Friday, July 03, 2015 05:21 PM


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