It's no surprise that a turbulent stock market is making some investors in employer-sponsored 401(k) retirement plans wary of putting any more money into these plans.But a volatile stock market doesn't mean you should stop or cut back on contributions to your 401(k).
In fact, you should do just the opposite. If you've reached the maximum annual contribution this year to your 401(k) and still have money left over to invest, then you may want to consider a Roth or traditional IRA. If you need liquidity, you might want to fund investments outside of your retirement accounts.
Most 401(k) investors should plow as much money as they can into these plans in order to benefit from their employer's matching contribution and tax deferred growth, and also to take advantage of a simple strategy called dollar-cost averaging.
By continuing to invest a fixed dollar amount each month into your 401(k)'s stock portfolio, you're able to buy more shares when prices are low and fewer shares when prices rise. Add that to your employer's matching contribution and tax-deferred compounding, and you're poised to see the value of your plan go up when the market rebounds.
Keep in mind that dollar-cost averaging does not guarantee profit or protect against loss and you should consider your financial ability to continue purchases at low levels.
If you're worried about your declining 401(k) balance, you may want to look at some of these options:
•Diversify into bonds. If you're 100% invested in stocks and are uncomfortable with the volatility, shift more of your 401(k) assets into fixed-income investments such as bonds, which may offer your portfolio more stability and income to fund your golden years. However, avoid wholesale switches back and forth and it's a good rule of thumb to consider having at least 25 percent of your portfolio in stocks throughout your retirement to keep ahead of inflation and keep your retirement income growing.
•Retire later. Delaying your retirement one or two years can have a dramatic effect on the value of your retirement portfolio. For example, if you're 40 years old and plan to retire at age 55 with a portfolio currently valued at $300,000 earning 8 percent annually, you would run out of money at age 73 if you withdrew $100,000 in income each year beginning at age 55. However, assuming the same numbers, by postponing your retirement only two more years to age 57, that same portfolio could last until age 85, about 12 years longer.
•Work part-time. More retirees are finding that the good life doesn't always mean relaxing poolside. Many become bored and start second careers or work part time for some extra cash.
By working part time you can decrease the amount of income you draw from your investment assets such as your 401(k). This can greatly extend the life of your 401(k) assets and provide a potentially higher income in your later years.
•Reduce debt. Paying off high-interest credit-card debt and other loans can put more money into your pocket each month that can reduce the amount of income you need to tap from your 401(k) or buy more time for your portfolio to grow.
Because many mortgage balances are higher on average than they were a decade ago, that means refinancing your mortgage may save you a significant amount each month even if mortgage interest rates drop only one to 1.5 percent.
Please note that the examples above are for illustrative purposes only and do not reflect the performance of any particular investment.
Your financial advisor can help you create a plan to suit your individual needs and can help discuss other alternatives to help you better plan for retirement.
This column was provided by Barden Winstead and Wachovia Securities LLC. Member NYSE/SIPC, a registered broker-dealer and a separate nonbank affiliate of Wachovia Corp.
