Small steps taken now, no matter your age, could make or
break your financial future — including whether or not you will have a
comfortable retirement. To make sure you’ll be able to retire how and when you
want, start by reviewing your 401(k) plan. The task may seem daunting given the
number of considerations, such as investment allocations, deferrals, and risk
preference, but we’ll make the process easier by focusing on these three areas:
As a 401(k) investor, one of the few things you control is
how much you save. It is important to save/defer as much as you can, as soon as
For 2015, the deferral limits set by the Internal Revenue
Service for all defined contribution plans (401(k), 457, 403(b), and the
Federal Thrift Plan) is $18,000, with a $6,000 "catch up"
contribution for those over 50. According to The Vanguard Group's, "How
America Saves 2014," the 2013 average deferral rate was 7% and the average
annual contribution was $8,327, across its participants — which means that for
most Americans, there’s still a lot of blue sky to maneuver before hitting the
The other area that you control is how and what you invest
Your employers' defined contribution plan will have an
investment lineup of 13 investment options on average. They may range from
asset-mixed funds like target-date funds, lifestyle funds or balanced funds,
which are automatically diversified and rebalanced, to stock funds, bond funds,
money-market funds and stable value funds. The latter funds permit you to build
your own portfolio.
Baby boomers in or near retirement don't have much time to
rebuild wealth if markets decline, and should preserve the nest egg they worked
hard to build. Two low-risk investment options available in 401(k) plans are
stable value funds and money-market funds.
Stable value funds are only available in employer-sponsored
defined contribution plans, and therefore, they don't have the same recognition
as money-market funds. Like money-market funds, stable value is a low risk,
Money-market funds are low risk mutual funds that invest in
short-term debt securities. As of the third quarter 2014, stable value funds
earned on average 1.98%, which is almost 200 times higher than money-market
fund returns of 0.11 % and typically, stable value funds have exceeded most
money-market funds from 50 to 200 basis points.
Seize the moment and get on course for retirement. Evaluate
your 401(k) plan and check these three items off your to-do list. You may have
forgotten about all of your other resolutions, but don't ignore this one,
because your future financial health and happiness depends on it.
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