Your 401K Retirement Plan: Is it What You Know?

Can too much information be a bad thing? As we enter in the next decade, already eight days old, most of us have broken, or fudged just a little, on the New Year's resolutions we promised ourselves. In many cases, these commitments to change your lifestyle, reverse the bad habits, or embrace some new ones are often loftier than life allows. While change is good and change is constant, it is also incredibly difficult.

Now we have two senators attempting to give 401(k) investors a glimpse of their futures. Currently, the Social Security Administration does this in the form of a projection delivered to you just before your birthday. This statement is designed to help you track your employer contributions. But it also gives you some idea how much monthly income you can expect. For numerous people eyeballing retirement, this is the jumping off point. From here, they make calculations on how much they will need to save on their own to make up the difference in what they perceive as a livable, post-work income. The question is: would this be helpful with your 401(k) balance?

In many cases it would. But in an equal number of instances, it could be more trouble than it is worth. The bill introduced to the Senate by Jeff Bingaman, D-N.M., Johnny Isakson, R-Ga., and Herb Kohl, D-Wis. would require plan sponsors to give a snapshot of the future, a look at how much your 401(k) is worth in real dollars, calculated with inflation in mind. (Even Social Security doesn't take their projections that far.)

AARP, the Women's Institute for a Secure Retirement and the Retirement Security Project all support the idea of giving current workers a glimpse of where they stand in the future based on what they are doing today. Those blessing offer a counterpoint to the criticisms that have arisen to the proposed bill.

Consider where the vast majority of us are. After things went south in 2008 and early 2009, three things happened to the 401(k). One, many of us stopped contributing in part because our employers stopped matching those contributions. Two, we moved to the sidelines taking our losses into cash or other types of conservative investments. Or three, we moved what was left in a target date fund.

This investment interruption will come back to haunt us. But it is an indication that we have not come far enough along in this journey to call ourselves smart investors. Had we done nothing: kept our portfolios where they were, kept investing even if the match disappeared, and even increased that contribution if the match went away, we would be back to even if not further along. But we didn't.

And now, the good senators what to tell you how bad things really are. If you look at the average account balance, which is estimated all over the place by whomever you happen to talk to, the average monthly withdrawal rate from your 401(k) when you retire is around $300 a month. The Employee Benefit Research Institute and the Investment Company Institute made their calculations based on year-end 2008 account balances of $45,519. If you use that number, the monthly distribution would be closer to $225. Scary to think that all your 401(k) will do is pay your utility bills.

The critics fear that this sort of information will force folks to invest in riskier investments to try and regain some of those lost portfolio balances. While that might be an okay maneuver for the younger investor (40 years or younger), the older you get, the more worrisome this is. If you fall into either of these groups, the same advice applies:

1. Increase your contribution. Most of us average about 6-7%. Even a couple of increased percentage points can have some long-range differences in that balance at the time of distribution.
2. Get out of your company stock. Investors remain over invested in one company and no one worth their mettle will tell you this is good idea. Even if your company is on a tear. If your 401(k) matches only with company stock, invest only to the match.
3. Have more than one fund. Many folks are either indexed in an S&P500 fund or fully invested in a target date fund (one that picks the year you want to retire and adjusts your portfolio accordingly). Spread your risk. You will need to take some in order for your money to grow and many of us will want to take more than we should. By spreading it around among three of four funds, you can at least be more helpful to your retirement than harmful.

Paul Petillo is the Managing Editor of Target2025.com

Variable Annuities of a Different Sort

Older investors may have a new annuity to examine in 2010. It may be simply a better-for-the-insurer version of the old variable annuity mouse trap. Younger investors also need to take note of this variable annuity product as well.

Annuities come in all sorts of flavors. Single premium annuities are an all-in type that is purchased in a lump sum. Flexible annuities spread the payments over a period of time. Sometimes these are deferred until a later date whereby the investor can withdraw money all at once or in scheduled payments. Investments grow in a tax-deferred environment. Fixed annuities offer the investor the lowest risk (in part because the insurance company invests in bond funds) which insures your principal is never lost. Immediate annuities are also lump sum investments that begin distributions immediately.

But there is a new variable annuity product coming to market that will attempt to lure a wide range of investors into its trap. Everyone should take notice of what this investment/insurance product offers in large part because the sales pitch is designed to play off your fear of losing what you already have gained.. Question is whether you understand what this trap means to your retirement and whether it is worth paying the high cost.

Paul Petillo is the Managing Editor of Target2025.com

Five Investment Questions for 2010

Should you consider past results? By all means.
Is longevity important? Yes, but not necessarily the fund’s length of service.
Does size matter? How do you determine size would be of greater importance.
Who’s your Daddy? The larger the company the greater the likelihood your fund has orphan funds embedded in your portfolio.
How so do you diversify? A little of this, a little of that

Most of us look at the turn of a calendar year with the hope that the investment mistakes we made in the previous year will not be made in the new one. This is noble and in many cases futile. These attempts are usually too difficult to handle, which is why, in many cases you haven't done anything before this point.

But with little effort, you can change how you invest. For the vast majority of us, investing requires far too much time. It requires continued education (which I fully recommend), frequent monitoring (which can involve little more than opening your statement just to make sure your investments are going where you intended) and a clear-cut understanding of where you are on the timeline (beginning to invest or at it for awhile).

Altering bad investment habits is not that difficult. Five Tips for 2010...

Paul Petillo is the Managing Editor of Target2025.com