When Your 401(k) Isn’t Enough

Only one in 10 people are properly preparing for retirement. Here's how to make sure you're on track.

brokerage window option, that number is expected to grow quickly, accordin
g to Cerulli Associates, a Boston-based financial research company. The major plan providers-Charles Schwab, Fidelity and T. Rowe Price-are making the option available to companies that sign up with their plans.

Here’s how it works: employees can choose to invest a portion of their account in stocks and leave the rest of their account in mutual funds. They then set up a brokerage window account with a participating broker affiliated with their company’s plan, and can begin buying and selling stocks just as they would with any other brokerage account.

Some brokers require a minimum investment, usually around $2,500, and all charge a one-time fee (ranging from $50 to $100) for using the option. Of course, commissions are also applied to every trade. Just as mutual fund earnings in your 401(k) are tax-deferred, any earnings on stocks in your account will not be taxed until you withdraw your money at retirement. Keep in mind, though, that your retirement savings are a long-term investment, and you shouldn’t get in the habit of actively trading your nest egg.

How do you know if brokerage windows are a good choice for you? Toian Bowser-Alexander, a certified financial planner with Financial Network Investment Corp. of Pasadena, California, points to the same rules that apply to all equities. “It depends on your age and risk tolerance. But as long as you’re breathing, you definitely need growth.”

If your employer’s plan offers a brokerage window, your best option may be to use it to supplement your fund choices. Be aware, though, that picking individual stocks puts the investing onus squarely on your own shoulders and no longer on those of your 401(k) plan administrator. It’s not easy to choose winners, so be sure you do thorough research-via the Internet, the business section of your local paper, etc.-and choose ones that you expect to hold for the long term.

Retirement-saving guidelines at a glance

  • Emergency fund: Most experts recommend a stash of six to nine months’ worth of living expenses in a liquid account, such as a money market mutual fund.
  • IRAs: In most circumstances you can contribute up to $2,000 in pre-tax money to a traditional IRA, which will be taxed at withdrawal, or the same amount in after-tax money to a Roth IRA, which will not be taxed upon withdrawal.
  • Annuities: This insurance product guarantees a steady income stream in retirement but often entails high fees and stiff penalties for cashing out early. To do your own research, see www.annuitiesonline.com.
  • Mutual funds and stocks: Most experts recommend a portfolio weighted for growth, with the remainder in cash equivalents and bonds. For a rough estimate, subtract your age from 100 and invest the resulting percentage in equities.
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