Your 5-Step Retirement Plan
by Diego Vallota
If you’re planning to retire sometime in the next 10 years, here’s some crucial advice: Take a very hard look at your 401(k).
While employer-sponsored savings plans, such as 401(K)s, usually are a great place to stash money during most of your working years, they may not be as great if you’re getting ready to call it quits. Although plans are broadening their menus of investment options, many are still heavy on stock funds and don’t offer many conservative choices to preserve wealth. Such choices are critical after a multi-year run-up for stocks and at a time when traditional bond investments are looking quite risky.
What to do? Here’s a five-step plan to address your 401(k) if you’re within 10 years of retirement:
If you haven’t done it lately, review your 401(k) investment mix.
Most people forget how their money is allocated in the plan. Over time, a portfolio may become too heavily weighted in stocks. As you approach retirement, you want to become more diversified and more risk-averse.
Beware of the rate sensitivity of any fixed-income funds you own in your 401(k).
Bonds traditionally were the safe-haven choice for near-retirees and many 401(k) plans have offered an intermediate-maturity bond fund as an option. Medium and longer maturity bonds pose a risk. Bond prices and yields move inversely, and as rates rise, bonds and bond mutual funds can lose principal. A bond fund that focuses on intermediate maturities might have an interest-rate sensitivity or “duration” of around five years. This means that if interest rates were to rise broadly by one percentage point, the fund’s principal value could drop by as much as 5%.
Look for greater variety within your 401(k).
When we construct portfolios for our clients, we include a mix of U.S. and International stocks, multiple types of bond exposure and alternative investments such as commodities and a variety of hedge-fund like strategies. We do this because, in the long-run, a properly diversified portfolio can help reduce volatility and increase returns. Check the lineup of funds available in your 401(k) for offerings that might possibly zig when conventional stocks zag.
Use IRAs and other accounts to complement your 401(k).
If you’ve switched jobs, you may still have money in the past employer’s 401(k). You may want to transfer that money into an IRA. You may even be able to transfer some dollars from your current 401(k) to an IRA before you retire. Many plans permit withdrawals as they are sometimes called “in-service distributions”. This could provide access to types of assets that aren’t available in your 401(k). For example, you might use an IRA to own a “strategic income” fund, a type of fund that can invest in any area of the bond market and shift its investment holdings to limit rate risk.
Get professional advice.
Good advice is worth the cost as you enter the final stretch of retirement investing when it is particularly important to avoid costly mistakes and hold onto your life savings.
Retirement saving is kind of like flying – the most critical parts are the takeoff and landing. Contact our retirement planning professionals today.