Question for financial gurus

[Mrs. Schmidty]

I contribute a portion of my paycheck to my 401k account handled by T.Rowe Price each payday (every other week). My contribution exceeds what is necessary to get my company match and is broken down into 3 categories: 33% low risk, 33% med risk and 34% high risk (supposedly high return).
I'm 32 so I don't plan on retiring anytime soon. I had planned on changing the percentages around to more aggressive before the market started taking a nose dive and while I'm thankful I didn't, my question is now what? Should I keep contributing the same amount and just move it all into more secure, or should I cut back and only put in the 2% I need to get the company match? I like to look at stock prices falling as they're going on sale, so to speak, but is that really a good way to look at it? I took economics in college and if I had spare money to spend I would consider buying up low cost shares that would go up later, but that's not really an option (I don't think).
HELP!

[DanGarion]

Well "conventional" wisdom says to continue what you are doing because it will all average out and in fact now that you are buying low you are in luck... Of course it doesn't feel like that when you see all the doom and gloom talk. Remember this is a long term investment don't react just because of what's happening now, yadda, yadda, yadda...

[Flasch186]

Ask MBBF for his accountant's phone #.

[flere-imsaho]

First of all, see if you can re-allocate into Index Funds only. These are mutual funds without managers that simply follow one of the indexes, the most common being funds that follow the S&P 500. The reason is that the vast majority of mutual funds don't beat the indexes, while they charge much, much higher fees than the index funds. Unless you happen on the "golden" fund, you're just throwing money away.

Secondly, if your retirement horizon is measured in decades, it's still a good idea to be putting money in, if you believe the stock market will be higher (especially significantly higher) in, say, 30 years than it is now. I know I'm continuing to contribute at the same rate as always.

The only thing that would make me change would be a big financial change personally (such as my wife being laid off). I'd pull down my 401K contribution to put an added buffer into my short-term savings. But I view the current conditions as a buying opportunity. Of course, I'm only 35.

[Suburban Rhythm]

1) I would continue allocating at least up to what the company matches. From above, it looks like they match the first 2%, which seems low to me. But don't leave any of that free money on the table.

2) As far as where to move your funds, it depends on your level of aversion to risk. You've got 30 (minimum) years to retirement. Higher risk funds will rebound more-- when they rebound. How much are you willing to risk-- by selling out of your low (fixed) to mid (large cap) funds and investing that cash into the high risk stuff?

3) to echo what Dan said above-- don't panic. This is long term. IMO, moving everything towards lower risk investments now is a mistake. You are young enough to be able to take risks now.

[RainMaker]

How do you buy bonds and stuff with your 401k? Are they included inside those different options. Someone had told me that the percent of bonds you own in your portfolio should be your age.

[Suburban Rhythm]

Originally Posted by RainMaker

How do you buy bonds and stuff with your 401k? Are they included inside those different options. Someone had told me that the percent of bonds you own in your portfolio should be your age.

You should have options to buy fixed funds. Those would be geared more towards income rather than growth potential. Which, as you are closer to retirement, you want a larger percentage is secure items, like fixed, than volatile, growth oriented items.

I've never heard that before re: % of total in fixed equal to your age. That is an OK approximation I guess, although not perfect. At age 30, I'd say 30% is too high of an allocation into fixed. Conversely, at age 65, I'd say that is not enough moved into fixed (assuming you plan on retiring within a few year of 65).

[flere-imsaho]

Some of your 401K options should be either bond funds or mutual funds that include a percentage of bonds in the mix. If you read the summaries of your fund choices they'll lay it out pretty clearly.

I hadn't heard the idea of having the % of bonds in your portfolio equal your age, but I guess the theory behind that is that you want to decrease your risk as you age and bonds are generally pretty risk-free.

The bottom-line on allocation, really, is that you need to balance your aversion to risk against a need to grow your 401K/IRA investment against hedging against losses once you get to within a certain number of years to retirement.

For instance, if you're really averse to risk and in your 30s, you could put everything into bonds, but then your investments probably aren't going to even outpace inflation. That's OK if you're OK with basically using your 401K as nothing more than a tax-advantaged savings account. You'll almost certainly need to contribute more in your lifetime than people who have a more aggressive allocation.

For another instance, people could learn from my father's experience. He's going to retire in a year or so, and about 5 years later re-allocated all of his retirement funds from a stock/bond mix to basically all no-risk investments, including cash. As a result, he's lost nothing from his portfolio and still has all the money he was planning on having to retire. It's clear a lot of people his age kept their retirement money in equities and are now looking at not retiring for 5/10/15 years as a result.

My advice remains the same:

• If you're under 50, put at least 10% of your income into your 401K and put it into index funds. And then forget about it.
• If you're under 50 and can't put 10% away because of your current financial situation, that's OK. If you need liquidity in this current situation, you need liquidity.
• If you're above 50 (or if your retirement horizon is less than 10 years), see a real financial advisor (one who charges a fee, not one who works on commission) about how to rebalance your portfolio to hedge against, or simply remove, risk.

Oh, and if you're in your 30s and aren't operating off a household budget, you really need to do this. It isn't a bad idea for folks under 30, either.

[Passacaglia]

Threadjacking a little -- I've been pretty much just skimming the thread, but that 10% 401K contribution seemed pretty high. Wouldn't it be better to pay down a mortgage than to put more than what an employer will match into a 401K?

[Passacaglia]

Given that I'm one of those weirdos planning to pay off his mortgage, that is.

[terpkristin]

Wow, what a great question. I'm in a similar boat, though my company matches I think to 7. Might be 5, either way, I'm contributing enough to match plus a smidge, right now. Was thinking about moving things around, but since I'm still young (will be 30 in September), was figuring it might just be worth waiting out the ride..

/tk

[fantom1979]

Originally Posted by Passacaglia

Given that I'm one of those weirdos planning to pay off his mortgage, that is.

I am pretty sure Obama is planning on paying off your mortgage for you... Put your money in the 401k





Seriously though, I would personally put that money into a 401k.. Only because when I am ready to retire, it will be nice to have that money. If I spend that money a little at a time to pay off my mortgage, I might "own" my house a little sooner, but I my retirement fund will not be as high.

[flere-imsaho]

Well, I'm of the opinion that you should always contribute at least as much to your 401K as your company matches. As someone else said, it's basically free money, and you shouldn't say no to free money.

Should you pay down your mortgage instead of contributing at 10% to your 401K? That's a more complex question based on a number of factors but in general I'd say no. There are just too many tax advantages (now and later) to contributing to your 401K, plus the earlier and more you contribute to your 401K, the more growth in that investment you will see, on a considerable scale.

Having said that, if your mortgage is in any way onerous, I'd look to pay that down in lieu of the 401K contribution. This is consistent with my advice that any contribution level to one's 401K (and/or IRA) should be tempered by the needs and plan of a good budget as well as a) having an emergency fund and b) having appropriate liquid cash for your situation (i.e. a single 25-year-old probably needs less in liquid cash than a married 35-year-old with two kids).

Of course, if you're closer to retirement than not (i.e. over 50, or over 55), you may want to prioritize paying off a mortage over 401K contributions because the weight of a mortgage on a fixed income is a bigger issue than the potential (smaller) return on investment through further 401K contributions.

Those last questions, however, can easily be answered by developing a good budget and running the numbers (not to sounds like a broken record).


Lastly, one of the great things about contributing high to a 401K is that because the money leaves your paycheck before you even see it, you get used to spending (even without a budget) at an artifically lower level. After some time you don't even notice how much money is going away to your 401K, and you budget for downturns with an outflow to 401K already as a given. This is important, because psychologically a lot of people contribute low to their 401K thinking "when we're in better shape we'll contribute more" and then never contribute more. Given the importance of your 401K towards your standard of living once retired, it's good to get out of this mindset as soon as possible.

[Kodos]

Plus, hopefully your average yearly return percentage on the 401(k) will be higher than the interest rate on your mortgage. Although that is not likely to be the case at the moment.

[fantom1979]

Originally Posted by Kodos

Plus, hopefully your average yearly return percentage on the 401(k) will be higher than the interest rate on your mortgage. Although that is not likely to be the case at the moment.

Maybe if i used absolute values

[lordscarlet]

It's a little more complicated for me -- I was paying extra to my mortgage, but I changed it to 401k. My company matches 50% of 100% of my contributions, so maxing out is taking full advantage of the matching.

[SportsDino]

Would second the index fund advice, I trust managers about as far as I can throw them. Which, if I ever actually saw one might be decently far, but as far as I know most of them are nameless schmucks who don't know shit... apologies to use financial dudes out there. (And I'm mostly speaking of equity market).

As for amount, I would go up to the company match (or even half matching if you have that arrangement). However, if you have some high-interest debt (credit card, loans) I would suggest taking care of that before 401k, especially over the match. Paying off debt is a certain return and will probably increase your cash flows if you can take advantage of paying off balances early to reduce total cash going out. It never hurts to have plenty of cash on hand, versus in a 401k account where they act like you are the devil if you withdraw before you are a geezer.

There also is the mental effect, if you don't feel strapped for cash and are happy you will probably be more productive, and do better at acquiring more money in the first place.

You can get your high risk money in with the index funds, a lot of them are down down down.... always the potential for complete economic disaster, but I'll admit part of my ultra long term 'boring' profile (not my long stock profile, this has everything from annuities, money markets, and guns and ammo) is a collection of various index funds I feel will have to rebound at some point.

If your offering does not give details, I would highly suggest not using it and searching for another. If you are not given an option that clearly says index fund, bond fund, and so on, then that is messed up.