Fresh Ideas for Retiring Rich
These seven bold strategies can help you supercharge your savings and realize your dreams.
By Mary Beth Franklin, Senior Editor
From Kiplinger's Personal Finance magazine, October 2005
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Sell out and start fresh
7. Doug and Marlene Carnahan were doing a good job socking away money for retirement in their company 401(k) plans, taking full advantage of the maximum salary-deferral limits and additional "catch-up" contributions allowed for workers 50 and older. But neither was sure that they were investing money in the best way to fund their retirement, which they hope to begin in ten years.
So the Carnahans decided to start fresh and reallocate all the funds within their retirement accounts. There are no tax consequences for liquidating investment positions in a 401(k), as long as the money remains in your retirement account. "We both have excellent 401(k) plans, and both our companies offer matching contributions," says, Doug, 52, a computer engineer with Fujitsu in Kansas City. "But I have 60 funds to choose from. How do I pick the right ones?"
Despite online retirement-planning tools and general guidance on diversifying among asset classes, Doug's 401(k) plan still lacked one thing: specific advice on where to invest his money. So Doug and Marlene, 52, decided to pay for personal guidance from Smart401k. They filled out online questionnaires about their retirement goals, their time frame and their feelings about investment risk. Then they sent their plans' fund choices to Smart401k, which recommended the six best funds in each of their plans to diversify their investments. Smart401k charges $200 per year per person for the service, which includes quarterly reviews; family members in the same household get a 20% discount, so together the Carnahans pay $360 per year.
Doug and Marlene's goal is to double the size of their $600,000 retirement portfolio over the next ten years. "Smart401k put us on the right track," says Doug. "When I was doing it all myself, I was seeing more losses than gains. With its recommendations -- including funds that cover big companies, small companies, international stocks and some bonds -- I've done much better."
Plan sponsors vary widely in the amount of help they offer participants. Many provide planning tools to help you figure out how much money you will need in retirement and how much you'll need to save to reach your goals. Some offer generic advice about diversifying across various asset classes. Others contract with third-party advisers to recommend specific funds. The latest trend is toward simplification: Some companies enroll you automatically in their 401(k) plan (unless you opt out), increase your salary deferral automatically each year and offer one-stop investment solutions with balanced funds targeted to your future retirement date.
If you don't have access to retirement-planning tools or advice, Scott Revare, chief executive officer of Smart401k, suggests you keep two key principles in mind: Diversify your investments across appropriate asset classes based on your risk tolerance and time frame, and rebalance your retirement portfolio at least once a year. A recent study by
Hewitt Associates found that the majority of workers made no attempt to rebalance or reallocate their 401(k) holdings last year. "Individual types of funds will make a run, as small-company stocks did last year," says Revare. "As a result, you may become overly invested in one type of fund, exposing yourself to unnecessary risk." Restoring the original percentage allocations to each fund in your 401(k) lets you realize your gains and bring your portfolio back in line with your goals.
-- Research: Jessica Anderson