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.