Stay on course with a long-term financial
strategy.
By Kathryn Badger
With the introduction of the 401(k) plan in
1981, employer-sponsored retirement savings plans have surpassed traditional
pension plans as a primary source of retirement. In effect, this has
significantly increased individuals’ responsibility for their retirement
planning, while at the same time forcing them to grapple with a host of new
investment options and tax laws. Tack on the recent war plus political,
economic and corporate events and scandals - and their effect on the financial
markets - and many investors are asking themselves how to assure that they
will be able to achieve their retirement goals.
Some studies show that women investors, once
they are educated about their finances, often do a better job at managing
their assets than men. In fact, nine out of ten women manage their own
finances at some point in their life. Women are starting businesses at twice
the rate of men and about a third of working women earn more than their
spouses. This being said, men and women alike are still not adequately
preparing for retirement.
Address Your Immediate Concerns
As a result of the bear market, some investors
may be thinking more conservatively with regard to their investments, or some
may be in denial and are avoiding careful examination of their retirement
assets because it’s too upsetting. Either of these responses – pulling back
into "safe" investments and waiting for things to bounce back or ignoring the
situation completely – could actually be putting a secure future at
unnecessary risk.
The fundamental principle of investment
planning is portfolio balance, and that means first understanding the make-up
of your complete portfolio; including 401(k), IRAs and other tax-deferred
investments, as well as your taxable investments.
In addition, investors need to examine their
concentrated positions and consolidate their scattered assets into a plan that
manages the risks of those assets in times when the market is especially
volatile so as to avoid stagnation.
Avoid the "One Event Wipe Out"
In the last couple of years, many of us have
been moved by stories of retirement savings of "regular" people largely wiped
out because they held almost all their savings in their company’s stock, only
to see it tumble in value. It goes without saying that the old cliché still
rings true – don’t put all your eggs in one basket.
So what steps can you take to provide for the
kind of retirement you expect? Investors should take full advantage of the
tax-deferred status of their employer-sponsored accounts and IRAs. The
Economic Growth and Tax Relief Reconciliation Act of 2001 boosted contribution
limits for these plans, and offered participants age 50 or over a chance to
catch-up with a provision that allows them to contribute an additional amount
over the annual limit.
Employer-sponsored retirement accounts, such as
a 401(k), can still provide a significant tax-efficient way to save for
retirement, if managed correctly, along with other vehicles to create a
complete retirement portfolio. Although 401(k) plans overall lost money for
the first time in their 20-year history in the first part of the new
millennium, according to Cerulli Associates, those who suffered most did not
properly allocate their 401(k) investments across different asset classes and
sectors.
Put Emotions Aside
When it comes to investing in company stock,
employees often enjoy the emotional side of being an "owner" in their company
or feel more at ease holding company stock because it is familiar. Although
investing in one’s company is common practice and can be motivating to an
employee, individuals still need to build a well-balanced retirement
portfolio.
Disciplined investing means not letting the
market or your emotions drive your actions. If you have too much of your
retirement assets tied up in your company’s stock, you’re taking a significant
risk. To be truly diversified, no more than 10 – 15 % of your assets should be
tied up in one position. If you are receiving any portion of your tax-deferred
or taxable compensation in company stock, make sure to take this into account
when balancing your retirement portfolio.
Not only is it important to examine your
holdings in an individual stock, but overall asset allocation is a critical
component to successful long-term investing. As a general rule, by balancing
the characteristics of stocks, bonds and cash, you can significantly reduce
the negative effects of market fluctuations. Your asset allocation should, in
large part, be determined by your needs, your risk tolerance and your
investing time horizon.
Diversification within each asset class can
also help lower the possibility that your portfolio’s performance will be
affected by the performance of one investment or sector. When planning for
retirement, there is no formula that fits every woman’s situation – one size
does not fit all. And, over time, depending upon the stages of your life, you
may need to adjust your portfolio’s investment mix.
Enjoy the Retirement Years
Compared with their counterparts of previous
generations, today’s Americans are working in different industries, retiring
earlier, and living longer. According to the U.S. Census Bureau, in 2001,
approximately 35.2 million people, or roughly 12.4% of the U.S. population was
65 years of age or older. The Census Bureau projects that number to increase
to about 39.7 million people or 13.25% of the population by 2010, and 53.7
million people or roughly 16.5% of the nation’s populous by 2020. Women are
faced with special issues when it comes to money: women generally live longer,
frequently earn less pay and often receive less pension than men. Many woman
can expect to spend 20 or more years in retirement, which poses a need for
many investors to contemplate what’s next for their 401(k) or IRA, rather than
just cashing out.
Because a retirement account is often an
individual’s largest financial asset, investment and distribution decisions
should be handled carefully so that you continue to work toward long-term
financial goals. Choices range from leaving assets in your former employer’s
plan, or rolling over to a traditional IRA and converting to a Roth IRA.
Retirement savings such as IRAs, IRA Rollovers,
401(k)s, company stock and stock options may be scattered across different
institutions and companies. Consolidating these assets can help you get a
better snapshot of your complete retirement picture and accurately analyze how
best to plan for your retirement.
Reaching Your Retirement Goals
The bottom line is that if you’re concerned
about your retirement plan, it’s important to consider the following
questions: How can you manage the risk of your retirement savings in a
volatile market? Is your future too dependent on your company’s stock
performance? Aside from your 401(k) and IRA accounts, what other tax-deferred
investments should you think about? How much money do you need to maintain
your lifestyle during retirement?
If you’re not sure about the answers to these
questions, consider seeking the advice of a skilled financial advisor.
According to a recent OmniTEL-Roper survey,
only about one-third of Americans (36%) feel they know how much money they
will need in retirement. This means that the majority of
the population is in the dark about the cost to
maintain their desired lifestyle in retirement and reveals a trend of just how
ill-prepared Americans are for their later years. Not knowing your "retirement
number" could cause you to delay your retirement or crush your dreams of
traveling the world or leaving an inheritance for your children.
The truth is, most people spend more time
planning a vacation than their financial future. No matter where you are in
your life or career, taking time now to develop or revise a financial road map
to prepare for your long-term financial needs is critical to reaching your
retirement goals.
Regardless of what those goals are, the
fundamentals behind your financial plan – asset allocation, diversification
and periodic financial reviews – will keep you on course no matter what the
markets may bring.
Kathryn Badger is Vice President – Investments
and Financial Advisor, with Merrill Lynch’s Private Client Group in
Washington, D.C. She can be reached at 202-429-4640 or kathryn_badger@ml.com
