Don't be too conservative when allocating a 401(k)

PERSONAL FINANCE

September 27, 1992|By Cox News Service

Atlanta -- With savings rates down, the future of Social Security in question and traditional pension plans going the way of the eight-track tape, experts say there's a retirement crisis looming.

But, they add, more and more employees are gaining a viable option through employer-sponsored 401(k) plans, which have emerged as an important long-term savings and retirement vehicle.

Such plans, offered by nine out of 10 large and medium companies, will come under close scrutiny this fall as many employees decide how much to contribute to their plans for the coming year and how to allocate their investments.

Seventy-two percent of eligible employees participate in 401(k) plans. Many companies fully or partly match employee contribution.

"I'm approaching mine from the perspective that there will be no Social Security," said Mark Johnson, franchise service manager for Atlanta-based Holiday Inn Worldwide.

He is putting 6 percent of his salary into the company's 401(k) plan, and Holiday Inn matches his contribution dollar for dollar.

"Mine has been very beneficial," added Debbi Foshee, director of trade marketing for Holiday Inn. "I borrowed against mine for a house."

And she is having second thoughts about her conservative investment choices. "I'm trying to decide whether to take a more aggressive approach," she said.

How much and where you invest depends largely on your age, investment goals, years to retirement, tolerance for risk and financial situation.

The most common investment vehicles are stock, bond and money-market mutual funds and guaranteed investment contracts, which provide a specific rate of return for a certain length of time.

Every person is different, so every portfolio is going to be different.

"If you have very limited resources, you can't afford to take as much risk as a person who has more," said Caroline Churchill of the Vanguard Group.

Also, the farther away you are from retirement, the more aggressive you can be in your investments, since you have a longer time to offset market volatility.

If you're more than 10 years from retirement, focus on stocks and stock mutual funds, experts say.

If you're within 10 years of retirement, you might consider a more moderate approach, balancing stocks with income funds, which primarily invest in bonds and utilities, and money market funds.

You should always have some money in growth stocks, regardless of your age, experts say. Generally, 401(k) investors are much too conservative.

Workers, on average, put more than half of their 401(k) money in guaranteed investment contracts (GICs) because they are attracted by the offer of a fixed rate of return and wary of the stock market's volatility.

But that could be a costly mistake over the long run, since stocks historically have outpaced alternative investments.

"It's not that GICs are wrong," said Patrick Renn, a principal with Consolidated Planning Group in Atlanta, just that 401(k) savers need to look into higher-yielding growth funds to build a larger retirement nest egg.

"Right now, you're barely earning real return after inflation if you stay in short-term money market funds," he said.

One easy way to determine how much of your investment should be in growth stock funds is to take your age and subtract it from 100, Mr. Renn suggested. For example, if you're 50, you should consider investing 50 percent in growth funds and 50 percent in income funds.

"It's a simple rule," Mr. Renn said. "But it's a very good place to start."

A 401(k) allows you to reduce your tax bill. You deduct your annual contribution from your income and make the investment before calculating your taxes. You also earn dividends, interest or capital gains free from taxation until you start withdrawing money from your accounts.

Despite the obvious benefits, only 46 percent of Holiday Inn's 9,700 eligible U.S. employees participate, said Tammy Oakes-Hughes, manager of the savings and retirement program.

"If you're concerned with just making it from paycheck to paycheck, saving is not a priority," she said.

But even if you don't earn a lot of money, you should participate in a 401(k) plan.

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