Is It Time to Restructure Your 401(k)?
If you’ve got 20 years or more until retirement, you might not give much thought to your 401(k) asset allocation. Maybe you’ve just dialed it up for growth, and each pay period, your allocation of your existing funds and your new contributions are all the same. And generally speaking, that’s okay. Many, if not most, people do exactly that.
But if you’re only, say, 5 years from retirement, I think it’s time to look again at your allocation. If you’re still 100% growth at that stage, you’re probably taking more risk than you should. Many people reduce their exposure to stocks as they approach retirement, as a kind of hedge against the market going down at just the time they’ll need some of that money. And THAT makes good sense.
So to potentially counteract any volatility, maybe you decide to go from 100% pure growth to a more balanced portfolio with some of the money, or into a stable value fund as retirement gets even closer – in an attempt to protect your money. So let’s say, hypothetically, at 60 years old, you’re now 20% in stable value, maybe 35 or 40% balanced, and the rest in pure growth, because that’s what your strategy calls for. Just making these numbers up.
But here’s where the problem comes in: while your asset allocation changed, your contribution should change. Otherwise, the new money you’re putting in each pay period is now going 20% into stable value, 40% balanced, and the rest into growth in this made-up example. This is where people may be making a big mistake. We’re not gaining any advantage by doing it this way.
We know the markets will have volatility. We know there will be up and down days. So where should our new money go? Where will it give us the biggest potential bang for the buck? In the less volatile area? The one that’s earning 2, 3, 4 percent with no real volatility, and no ability to dollar-cost average? No! It’s more likely to come on the pure growth side, the volatile area, the one that’s going to be up and down on any given week, given month, or given year – but over the next 10 or 15 years, could potentially do very well.
That’s the section of your 401(k) that you won’t touch for a decade or more. The more stable side will be the money that you’ll access over the next 5 years. This is the money you’ve set aside, money that will sit there just in case the market drops. It’s there so you can still get to it even after a market drop. It’s there to buy you time so you can continue funding the growth-oriented assets to take advantage of dollar cost averaging into the volatility of the market.
The set-it-and-forget-it nature of the 401(k) is a great way to get people to save, but it can also come back and bite you if you’re not paying attention when it’s almost time to retire. Right now could be a good time to take a look at your own situation to see if you’re lined up with your goals. Just give us a call. We’re here to help.
Important Information:
The information provided should not be considered specific tax, legal, or investment advice and is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. This material was gathered from sources believed to be reliable, however, its accuracy cannot be guaranteed.
All investments are subject to risk including the loss of principal. No client or prospective client should assume that the presentation (or any component thereof) serves as the receipt of, or a substitute for, personalized advice from Lucia Capital Group or from any other investment professional.
Before investing, carefully consider a mutual fund’s investment objectives, risks, charges, and expenses. To obtain a prospectus or summary prospectus, which contains this and other information, call your financial advisor. Read the prospectus carefully before investing.
Examples discussed are hypothetical, are for illustrative purposes only, are not guaranteed and subject to potential federal and state law amendments. There is no guarantee that you will achieve the results discussed or illustrated.
A dollar cost averaging strategy does not guarantee a profit or protection from loss. Since such an investment plan involves continual investment in securities regardless of fluctuating price levels, you must consider your willingness to continue purchasing during periods of high or low-price levels.
Rick Plum is a registered representative of, and offer securities through, Lucia Securities, LLC (“LSL”), a registered broker/dealer, member FINRA/SIPC. Advisory services offered through Lucia Capital Group (“LCG”), a registered investment advisor, and an affiliate of LSL. Registration with the SEC does not imply a certain level of skill or training.