Are You in 401k and 403b Misery?

Don't despair! None of us want to open those end of year statements or log in online. But it is your retirement, so don't be afraid to take charge!

People have asked what I am doing with my 401k, whether I am lowering the allocation (the money I put in from each paycheck) or getting out of stocks, etc. I'll tell you but first let me relay a little story.

Someone close to me, who works for a county school system, recently told me that her 403b (non-profit equivalent of 401k) "advisor" told her there that American Funds (the people that provide the different funds in her 403b plan) did not have a cash-equivalent fund for her to put her money into. Essentially, she is within five years of retirement and wanted a "near-cash" place to store the portion of her retirement money, so she would have some left when retirement came.

First of all, I am not sure why there is a middleman for her to change her allocation - maybe a union thing. Second of all, this joker encouraged her to stay in all stocks because the market was sure to make a turnaround in '09. Last time I checked, if you are five years to retirement there is no chance you should be in 100% stocks, unless your 401k is just a small percentage of overall retirement assets and it is what you treat as your "risky allocation", and there is no way this guys "knows" what the market is going to do this year. Third of all, I think this guy played on the person in question's wording. You see she asked for CD or CD like asset. The "advisor" could probably say truthfully that there was no CD option. He should have said, "but we have a cash equivalent fund you can put your money in". The same guy also put off the future retiree for a few days. These clowns should be willing to spend a few minutes on the phone with you whenever you call! If not, ditch them! (I am sure this will be a topic that will be picked up in the future.)

Anyway, as far as your 401k goes, don't be afraid to make adjustments to what makes you feel comfortable. But don't give up on using it altogether. In fact, this might be the time to increase the percentage you set aside to 401k. It is still one of the most tax efficient vehicles for saving even if you just invest in the money fund option.

Say your paycheck is $100 a month. If your goal is to save 15% of each paycheck and your tax rate is 25% then the math works like this - $15 of each paycheck goes to 401k and you are taxed on $85 dollars which leaves you w/ $63.75. If you skip 401k but still try to save 15% of each pre-tax paycheck you are left w/ $75 after tax and then $60 after you set aside your savings. So over the course of 24 paychecks (a year's worth) you are putting an extra $90 a year in your pocket or toward whatever you want by using the 401k option (almost an entire paycheck in this example!). So keep up that allocation.

As for me, I still have MANY years to retirement, but I felt the 40% hit of '08 and unlike the "advisor" above, I have NO clue what the market is going to do this year. So, I use some caution in my allocation. My current employer offers fidelity funds and the allocation of my deduction is as follows:

23% in a Dividend Growth fund
23% in a Overseas fund
23% in a Small Cap fund
23% in a Bond(like) fund
8% in their Money Market Fund

There is still a ton of risk within this allocation, but the dividend fund, fixed income (bond) fund and cash make me sleep a little easier. (Maybe I'll lose 30% instead of 40% this year.) You want to keep your risk tolerance, time horizon (time to retirement), and needs in mind. If you are retiring in five years and you absolutely need your 401k to survive in retirement, you probably want to raise your allocation but focus it in the money market options that your plan offers.

I am interested to hear what others think and are doing! Don't be afraid, take charge of your money.

-2outof4