Everyone wants a comfortable retirement, but the
road you take there will depend on your specific
situation. When you invest, you assume a certain
level of risk (but like everyone you’re hoping that your
holdings will increase in value).
One of the most challenging aspects of investing
involves matching your tolerance for risk with your
Beyond your 401(k)
Have you taken the time to really project the amount
of money you may need in retirement? While setting
aside a percentage of your income in a 401(k) is an
important step, chances are you will need more than
current limitations may allow you to save. Most people
supplement their employer-sponsored retirement
benefits and Social Security income with personal
investments. In order to develop a fitting plan, you
need to have your goals in sight.
In 2019, your elective deferral (contribution) limit for
your 401(k) is $19,000. If you’re age 50 or older, you
may save an additional $6,0000. While the
contribution often rises in upcoming years and your
employer may match contributions above this limit,
will your employer-sponsored plan allow you to save
enough? Cast your net as far as possible—can you
contribute to your 401(k) and afford to invest in other
opportunities? Increasing your savings rate now may
help you later.
Asset allocation and diversification
Are you an aggressive, moderate, or conservative
investor? Your answer probably depends in large part
on your stage in life and your financial resources, and
will most likely change over time.
Aggressive investors tend to have a longer time
frame—as many as 35 years or more to save and
invest until they reach retirement—and a greater
capacity to withstand loss. For example (the following
percentages will vary greatly by investor and their
definition of the terms aggressive and conservative
investments), stocks may account for 85% of a
relatively aggressive portfolio compared to 40% for a
more conservative portfolio. As investors near
retirement, their asset allocation strategies generally
change to account for lower risk tolerance and an
emphasis on income over growth.
With a 401(k), you become responsible for managing
your portfolio, not your employer. While one aspect of
a retirement savings plan is investing for the long
term, it is still important to stay involved and make
adjustments as needed. Choosing to be an active
money manager rather than a passive investor can
help you maintain the appropriate allocation strategies
and achieve your long-term goals.
Remember that it may be important to diversify within
asset categories. For example, spread your equity
investments among large-cap, mid-cap, and small-cap stocks, as well as vary your fixed-income
investments with different types of bonds and cash
holdings. The diversification strategy you choose for
your 401(k) should complement your strategies for
investments outside of your retirement plan.
Because retirement plans offer tax benefits, they carry
certain restrictions, such as when withdrawals can be
made without penalty. While funds in a 401(k) are
made with pre-tax dollars and have the potential for
tax-deferred growth, withdrawals made before the age
of 59½ may be subject to a 10% federal income tax
penalty, in addition to the ordinary income tax that will
Some 401(k) plans are featuring the Roth 401(k) too.
If your employer offers this option, you may be able to
designate all or part of your elective salary deferrals
to a Roth account. Although contributions are made
with after-tax dollars, earnings and distributions are
tax free, provided you have held the account for five
years and are at least 59½ years old when you
If you’re looking to save specifically for retirement, in
addition to your 401(k), consider a Roth IRA, which
allows earnings to grow tax free. While contributions
are made with after-tax dollars, your withdrawals will
be tax free provided you are older than age 59½ and
have owned the account for five years. Early
withdrawals may be subject to a 10% federal income
tax penalty, unless you qualify for an exemption.
Certain income limits apply.
Taking advantage of the tax benefits retirement
arrangements offer is a valuable strategy, but also
consider building more liquidity and flexibility into your
overall savings and investment plan. In the event you
need access to funds before retirement, have a
contingency plan such as an emergency cash reserve
and relatively liquid investments. However, keep in
mind how accessing savings in the short term will
affect your long-term goals.
As you look toward retirement, consider increasing
your overall savings rate, maintaining appropriate
asset allocation and diversification strategies, and
planning for taxes. Over time, your investments will
inevitably be affected by legislative reform and market
swings, but with a long-term outlook and continued
involvement you are better positioned to manage the
fluctuations and changes to achieve your objectives.
Investment returns and principal values will change
due to market conditions and, as a result, when
shares are redeemed, they may be worth more or
less than their original cost. Past performance is no
guarantee of future results.
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Diversification does not ensure against loss.
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