Building a retirement nest egg means saying no to temptation

The Ticker

November 05, 1997|By Julius Westheimer

I HOPE YOU invest the maximum amount regularly in your company's 401(k) plan. It is one of the best investments around. Here are items to consider when managing your 401(k) or other retirement plans: 1. Regarding pre-retirement distributions, Consumers Digest says, "Americans change jobs an average of seven times over a lifetime, but since workers often must withdraw money from a pension plan when they leave, each shift is a temptation to spend a few years of retirement saving. Seventy percent of people who take pre-retirement lump sums spend it and don't save it for retirement."

2. In your 401(k), don't load up on your company's stock. Many plans offer employees the opportunity to buy company stock, but don't go overboard; try to limit exposure to no more than 10 percent to 15 percent of your stock allocation. Reason: Your occupation and wages are tied up in your company and -- although it's unlikely -- if something goes wrong with your firm, you don't want to lose your job and a lot of your money.

3. Don't try to "time" the market. Although federal law requires that retirement plans must give participants ability to switch investments once a calendar quarter -- and many plans offer employees that chance each month -- I suggest you use the privilege sparingly. For example, half of the gain in the Dow Jones average over the past 10 years occurred in 10 of those 120 months, showing that it's almost impossible to pick the exact times to jump in and out.

4. In any retirement plan, don't be afraid to ask questions about performance numbers.

One important decision you have to make about managing your self-directed retirement account is what's called "asset allocation." This procedure involves dividing your monies among asset classes -- stocks, bonds and cash. Some studies showed that asset allocation is the most important factor in a portfolio's long-term performance. I favor diversification -- not "all of your eggs in one basket" but spread around based on your age, risk tolerance and employment time horizon.

Suggestion: Take the number 120, subtract your age from it and that's about the percent of your portfolio you want to have in stocks and stock mutual funds.

Example: If you're 40, you want 80 percent in equities to protect you against inflation; if you're 70, only 50 percent because at that age you want safety and income. The "120 Formula" is not carved in stone, but just a guide.

The IRS publication "Pension and Annuity Income" can help explain the thorny tax issues that surround retirement income. Phone the IRS at 800-829-3676 to receive a free copy.

Pub Date: 11/05/97

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