Getting Your 401(k) In Shape

If managed properly, this account should far exceed the monthly social security check as a source of retirement income

www.asec.org. Click on the “Ballpark Estimate” retirement planning worksheet, and plug in your own numbers.

Now you’re ready to take the next crucial steps: determining how much risk you can tolerate and how to allocate your funds among the many investment options. Risk tolerance and asset allocation go hand in hand. Risk is the possibility that your investment won’t produce the level of returns that you were expecting. All investments are risky, and some are riskier than others. But in general, the higher the risk, the greater the potential reward. Higher risk also carries higher potential for loss and greater uncertainty about the level of return.

Asset allocation is the process by which investors find the best possible returns for the level of risk they are willing to accept. In general, stocks are riskier than bonds, and thus have greater potential returns. Because younger people have a longer time horizon before retirement and can thus accept higher levels of risk, they should allocate a greater percentage of their overall portfolio to stocks. If you are near retirement age, and can’t afford to risk much of your savings, then you will want to allocate more of your portfolio to bonds.

There are rules of thumb to help you allocate your assets. Here’s one: subtract your age from 100, and put whatever the answer is into stocks. So if you are 35, you would put 65% into stocks and 35% into bonds. But such rules of thumb are not foolproof and are meant only as rough guides.

My company offers a brokerage account under my 401(k). Should I use it?

Emboldened by the easy money to be had in the late-’90s stock market boom, some employees pressed for even more choice, with the result being the Self-Directed Brokerage Account as a 401(k) plan option. This allows employees to pick investments almost as freely as they can outside their 401(k) plan. Typically, companies select a brokerage house to handle employee trades. To establish an account, workers transfer a lump sum out of their 401(k) account. They then allocate an amount to be transferred to their brokerage account from each 401(k) payroll contribution. Workers can buy stocks, bonds, or mutual funds with the transferred money.

What fees, hidden or otherwise, am I paying on my 401(k)?

For 401(k) plans a key issue is fees. What might seem to be low fees expressed in tenths of 1% can easily cost an investor tens of thousands of dollars over a lifetime. Loss of assets to fees automatically reduces the amount invested and thereby reduces returns. The compounding nature of returns can make fees a very expensive proposition.

Fees reflect two costs: plan administration and investment management. Those who closely follow 401(k) plans say it’s difficult to compare fees among plans. Fees vary for obvious reasons, such as types of investments offered, the number of participants, and the size of each 401(k) account. But they also vary for less apparent reasons, such as whether a 401(k) plan provider expects to get additional business if

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