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Your 401k will be okay
By Mike Rowan, eRollover.com
It is hard to believe, but one year ago Thursday marks the S&P 500’s highest closing on record.
Fast forward 12 months and the economy rests in a state of crisis. Virtually every American will feel Wall Street’s failure, even those tapping into their 401k. “Far as I know, I try to keep up but I’ve lost an awful lot of money in the last say three months,” says Rod Kessler, a recent retiree. Like other recently retired workers, Rod is leaving the workforce at one of the worst times in American history.
“The biggest risk you have when you retire is that there’s a down economy just before or just after you retire,” says Erik Pielstick, a local financial planner.
And that is one of the biggest problems the country is facing. So what to do? Should you risk the tax incentive and pull out early while there’s still money resting in the fund? Or do you wait it out?
“There’s always that feeling of fear when you see the market plummeting the way it is today,” adds Pielstick.
But don’t panic just yet. Here are some tips to ease your 401k fears: first, invest early. Invest now. If you’re in your 20’s and have access to a 401k consider taking it. With social security still a question mark, your 401k is as important today as its ever been before. Next, identify your risk tolerance for a fluctuating market. History says it will rise again. And finally: plan ahead. Start in your 40’s and manage your assets. Remember, this money should last you the rest of your life.
“If you get out of the market now and come back in when you think the market’s doing well, you’re doing the opposite of the American dream,”
To insure that you don’t fall victim to panic, please try to utilize a consistent asset allocation strategy. This can be easily done by utilizing eRollover’s asset allocator by clicking here.
This tool shows you how your 401k or other retirement plan should be set up according to your stomach for risk, and your general timeframe with regards to retirement. Just for kicks, I have added to definition of asset allocation below.
Inherent in asset allocation is the idea that the best-performing asset varies from year to year and is not easily predictable. Picking the “best” asset, although psychically appealing, is, claim proponents of asset allocation, a fool’s errand. Someone who “jumps” from the one asset to the next, according to whim, may easily end up with worse results than any consistent plan. Such a person can be quite successful at transferring value away from himself.
A fundamental justification for asset allocation is the notion that different asset classes offer returns that aren’t perfectly correlated, hence diversification reduces the overall risk in terms of the variability of returns for a given level of expected return. Therefore having a mixture of asset classes is more likely to meet your goals.
In this respect diversification has been described as “the only free lunch you will find in the investment game.” Academic research has painstakingly explained the importance of asset allocation, and the problems of active management. This explains the steadily rising popularity of passive investment styles using index funds.
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Tags: 401k, 403b, Asset Allocation, IRA, Retirement, Stock Market Crash
