A World Of High Inflation Poor Stock Returns And A Dwindling Social Security Reserve Can Be Unnerving To Retirees
Given the tumultuous start to the year for the S& P 500, it’s no wonder retirees and pre-retirees are nervous about the prospect of entering a prolonged bear market. Combine poor stock performance with a low-yielding bond environment and the possibility that Social Security reserves may deplete, and there is fair reason to be concerned. However, as we’ll explore below, there are several ways to make retirement withdrawals even more sustainable — and to ensure you’re covered in a variety of future circumstances.
Mistake #: Buying Too Much Of Your Companys Stock
If your employer’s stock shares are an investment choice in your 401, you may want to consider keeping your allocation to no more than 10 percent. Youre not being disloyal even the mightiest of companies think Enron and WorldCom can falter. With your salary already tied to your companys fortunes, you dont want a sizable part of your retirement savings to be similarly dependent.
Can You Lose Money In A 401
Its possible to lose money in a 401, depending on what youre invested in. The U.S. government does not protect the value of investments in market-based securities such as stocks and bonds. Investments in stock funds, for example, can fluctuate significantly depending on the overall market. But thats the trade-off for the potentially much higher returns available in stocks.
That said, if you invest in a stable value fund, the fund does not really fluctuate much, and your returns or yield are guaranteed by private insurance against loss. The tradeoff is that the returns to stable value funds are much lower, on average, that returns to stock and bond funds over long periods of time.
So its key to understand what youre invested in, and what the potential risks and rewards are.
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Can You Invest Your 401 In Individual Stocks
According to CNBC, 36 percent of Americans dont think theyll ever have enough money to retire. So if youve got a 401k through your employer and youre making regular pre or post-tax contributions each month, youre in great shape financially.
But as a working professional with a standard 401k and a talent for spotting amazing stocks, you might be wondering how much control over your retirement fund you really have.
Can you purchase individual stocks through your 401k? Can you use those funds to buy shares in Amazon or Disney? Read on to find out the answers to these questions and more.
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Picking Your 401 Investments
A 401 plan typically offers at least 10 or 12 investment funds, though some plans may offer a few dozen choices, including target-date funds. How do you choose among these options?
For many, the limited selection of funds in a 401 may be more of a benefit than a drawback, helping to simplify the process. For experienced investors, a limited fund choice is, well, limiting. These investors might prefer the unlimited selection available in an IRA. But most 401 participants want a good solution rather than a perfect solution .
There are two broad factors that 401 participants should look at:
- Long-term returns: These are the returns on the fund over five- and 10-year periods, as well as since inception.
- Expense ratio: Basically, this is the cost to hold the fund for a year as a percent of the money invested in the fund.
Participants should search for the best returns at the lowest costs, all else equal. Youll have to make a trade-off between the performance and the funds expenses sometimes, too. But it may be worth paying a higher fee for the prospect of much better long-term returns.
Youll want to be careful about buying any fund thats had a good recent performance, such as one- or two-year returns, but has delivered a mediocre performance over longer periods. Many investors make the mistake of chasing a hot fund, only to see its performance drop in the future.
Keep Cash Reserves On Hand For Emergencies
One of the worst things you can do to your 401 is to withdraw early, and, sadly, this becomes common during market crashes. Unfortunately, withdrawing your money before retirement usually means paying a penalty fee, plus your 401 will lose its longevity.
One way to avoid the temptation of reaching for your retirement fund during an emergency is to have an emergency fund, in cash, for when things get tough.
If youre wondering how much you should set aside, it should be enough to get you through a few months in case you get laid off and cant find another job, get hurt and cant work, or experience another unforeseen life event.
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Is It Ever A Good Idea To Hold Company Stock In A 401
Even if you earn your match in company shares, it doesn’t mean you have to stick around.
A version of this article appeared in September 2019.
Company retirement plans have changed significantly over the past few decades, with a few trends coming on strong.
In light of the fact that 401 participants are famously hands-off, plans have increasingly added nudge features to get more people saving: Roughly two thirds of plans now offer automatic enrollment, for example, up from just about half in 2012. Roth accounts have also shot up in popularity. Whereas 37% of plans offered a Roth option in 2009, about 70% of plans do so today.
Yet even as automatic and Roth features have grown more popular, another trend is clearly on the wane: company stock on the 401-plan menu. Whereas nearly half of employers offered company stock in their 401 plans a decade ago, either as part of the 401-plan menu or as part of an employee stock-ownership plan, that figure had dropped to less than 40% as of 2019, according to the .
Why the demise? Well-publicized employee stock-ownership debacles like Enron and Lehman Brothers have surely contributed to the diminished presence of company stock on 401-plan menus. General Electric , whose shares have dropped a stunning 34% on an annualized basis over the past three years, is the latest example of a firm whose employees have gotten burned by holding company stock in the 401 plan.
Let The Government Protect Your Money As Warren Buffett Does
Another strategy Buffett uses is to let the government protect his money. For example, two of the five most significant investments Buffett lists in his 2019 Berkshire Hathaway shareholder letters are giant banks.
Those banks are Wells Fargo and Bank of America . Interestingly, Wells Fargo and Bank of America are two of the infamous too big to fail financial institutions. That means the U.S. federal government must bail those banks out in a crisis because their collapse could trigger a depression.
The federal government bailed Wells Fargo out with $25 billion during the 2008 financial crisis. Moreover, Wells Fargo paid a dividend of 45 on March 1, 2019. Therefore, Wells Fargo is a dividend stock that adds another layer of protection.
Hence, Buffett protects his money by investing in institutions the government is likely to rescue during a crisis. Therefore, Buffett lets the taxpayers protect his funds by investing in big banks.
Buffetts thinking is that banks can run to Washington for help during a major crisis. Furthermore, the politicians will have to bail the bankers out to keep the crisis from getting worse.
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More Financial Advising Help
Seeking professional help to manage your 401 is a smart move. In 2014, Financial Engines Inc. published a report that concluded professionally managed assets perform an average of 3.2% better than nonprofessionally-managed assets. However, many professional investment managers could charge up to 3%.
SmartAsset can help you find a profitable solution to finding a safe and affordable way to get professional 401 management.
Understanding Reverse Ira Rollovers
Rolling the assets in an IRA account over into a 401 is sometimes referred to as a reverse rollover. Thats because its far more common, at least nowadays, to move assets in the opposite directionfrom a 401 to an IRA. This often happens when an employee leaves a job or decides they would like more investment options than a strict corporate 401 offers.
Its certainly possible to move assets between other types of retirement accounts, though. However, its important to check if your employers 401 accepts this kind of incoming transfer. Some plans do, but others do not. The IRS also provides guides as to what kinds of transfers are allowed and how to report them.
As this guidance states, you are only allowed one rollover in any 12-month period, and you must report any transaction when you submit your annual tax return for both direct and indirect rollovers. If you move assets out of your IRA to put them in your 401 or use them for another purpose, your IRA brokerage will send you a Form 1099-R that will show how much money you took out. On your 1040 tax return, report the amount on the line labeled IRA Distributions. The taxable Amount you record should be $0. Select rollover.
Though this maneuver is unusual, it can have advantages in some circumstances.
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Do I Adjust My 401 When Markets Are Down
First know this: you havenât lost any money even though your 401 value has dropped. You only recognize a gain or loss when you take a distribution. Most folks wonât tap their 401 balances for 10, 20, 30 or even 40 years. Second, since 1926, there have been 14 recessions and 14 market recoveries.* We like that batting average for recoveries. And third, in every 20-year period researched back to 1926, the US stock market has delivered positive returns.**
While history offers no guarantees, here are some additional perspectives that can help you more confidently determine the right path for you through good times and bad.
Jumping In and Out of the Market Is Typically a Bad IdeaGiven that markets can swing quickly, it can lead to some bad outcomes if you jump in and out of the market . Some investors get so nervous during a big stock market drop that they move their 401 money out of stock funds into a money market or similar cash equivalent, essentially selling stock at a low. Then when markets rise, they feel more confident and move the money back to stock funds thereby buying at a higher point than they sold and missing the opportunity for a better return.
Stay the Course vs. Not
Anne has more than double the nest egg value of Alex with $205,338 vs. Alexâs account value of $93,072. Thatâs the big deal.
The Upside of Dollar Cost Averaging
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The Art Of Balancing Your Portfolio
A well-diversified 401k plan requires regular maintenance or asset allocation for best performance. But over time, market prices might affect the desired asset distribution and fail to meet long-term retirement goals. Thats when the 401 needs rebalancing.
The assets investors initially set for 401s can change direction over time, depending on the overall returns. For example, if the required stock vs. bond ratio is 60:40, a bull market can change the balance after some time.
Presuming the percentage of stocks reaches 65% or 70%, the risk of losses in a market crash is also more significant. Investors must sell stocks and buy bonds to restore the balance, thus protecting 401 before a crash.
Target-date funds are the easiest way to rebalance a portfolio. Accountholders who want more control over their investments should regularly check their fund balance and consult financial advisors for a more tax-efficient approach.
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Is A 401 Worth It
You don’t have to master investing to allocate money in your 401 account in a way that meets your long-term goals. Here are three low-effort 401 allocation approaches and two additional strategies that might work if the first three options aren’t available or right for you.
No Comparable Tax Benefits
Investments in individual stocks offer no comparable tax benefits. However, some stockbrokers allow investors to purchase pre-IPO shares in their taxable accounts.
These shares often offer an enormous return on investment, but have strict terms, are not guaranteed to work out, and do not always provide the same protections for your money that a more established company might.
Others have restrictions on what can be done with your funds when you leave the company. Itâs either in the form of a withdrawal fee or in full forfeiture if you donât roll your money into an IRA within so many days after leaving your job.
On the other hand, investing in individual stocks offers a great deal of liquidity. You can buy and sell stocks as you please, within the limits of your available funds. This enables you to tailor your portfolio to match your specific risk tolerance and time horizon.
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How Your 401 Contributions Are Invested
Every company organizes its 401 plan for the best interest of the company and employees, so as a result, every 401 plan is structured a little differently. However, there are many similarities among 401 plans in general. For example, most 401 plans are managed by a fund manager who selects the investments for the plan. Although some 401 plans are structured where employees have a few more investing options available to them, it is rare to have a plan structured where you can select individual stocks. Roughly 20 percent of employers offer self-directed 401 accounts.
401 plans are usually very diversified, meaning their assets are held in several different types of investments including stocks, bonds and mutual funds. But, you typically wont have a hand in selecting the investments your 401 contributions are going to ultimately buy. On the other hand, if your employer has structured its 401 to give employees greater control over investments they want, then you should familiarize yourself with your individual 401 plan and contact the plans manager for more information regarding its self-directed brokerage window.
Can Retirement Funds Invest In Hedge Funds
Institutional investors, as well as pension funds, have contributed a large portion of this increase. Estimates vary, but hedge funds are thought to be invested in by up to 20% of European and American pension funds and 40% of Japanese pension funds. Managing, reducing, and indeed hedgering such liability risks can be done with the help of hedge funds.
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You Are Leaving The Wells Fargo Website
Retirement may seem a long way off and far removed from your day-to-day concerns. And yet, this is actually the best time to start planning and saving that is, when you still have time to accumulate the money youll need.
Here are some common mistakes that throw people off course in their retirement planning. Knowing these pitfalls should help you steer clear and save more.
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What Is A Stock Market Crash
A stock market crash is the sudden and simultaneous decline of stock value, with prices falling more than 20%. The impact is often unpredictable and follows after a major event that causes economic disturbances. While this is the incentive, the crash gains full force with impulsive stock selling due to panic and fear.
The stock market is exceptionally unpredictable, and price drops are just as regular as a price surge. But a crashing market is not the same as a declining one, also called a bear market.
While the first one has dramatic price plunges, a bear market occurs when stock prices fall over an extended period, characterized by pessimistic investor sentiment.
Since 1928, there have been over 20 bear markets in the U.S., but only several stock market crashes. Following the COVID-19 pandemic, 2020 saw the latest stock market crash, lasting from February 20 to April 7.
The crash had significant consequences on the economy, affecting the retirement plans of many Americans.
In precaution of another impact, many are now looking for ways to protect their savings.