Many people avoid opening their investment statements, including retirement accounts, such as a 401k.  As the unopened mail piles up the accounts suffer.  Now is the time to swallow that bitter pill and check back in with your retirement.

It’s all about personal responsibility regarding your financial life.  Know where you are spending, get a plan for saving, pay down your debt, file your taxes, and don’t forget about retirement.  There is a tendency to open an employer based retirement plan, make some random mutual fund allocations, and forget about it until you change jobs.  This is not a recipe for success.

Here is the simple rule: allocate your 401k based on how many years you have until retirement. 

Without outside professional guidance, which is always recommended where available, the easiest way to take control of your allocations is to follow these basic guidelines which focus on managing risk.  The principle is that stocks provide a higher risk, and potential return, than bonds.  Therefore the longer you have until retirement the more risk you can take with your portfolio.  This type of allocation should then be phased to decrease your risks the closer you are to retirement. Risk tolerance and personal preferences will dictate exactly where your funds should be invested. To demonstrate:

If you have more than 20 years to retirement, allocate 80% into stocks and 20% into bonds; 10 to 19 years to retirement: 60% stocks, 40% bonds; 5 to 9 years to retirement: 80% bonds, 20% stocks;  less than 5 years to retirement: 90% bonds, 10% stocks.

Mutual fund companies offer “age based allocations” in the form of funds cleverly  named things such as “target 2025” but you can’t rely on the fund companies to allocate for you. â€œTarget date” funds offer a range of stocks, bonds and other investments, and shift the mix as you approach retirement. But lately the market chewed up many of these portfolios — even the supposedly cautious ones. You must take some control.

The key is to change your allocation based on your needs: when you near retirement the need is greater for income and stability of principle.  When retirement is far off, the need to grow your investment is greater than the risk of losing principle.  Follow these guidelines to rebalance your retirement account today.

Further Reading

• 5 Steps to Maximize Retirement Savings (0)
• What is Time Horizon Investing? (0)
• A Youngster’s Guide to Investing Early (0)
• How to Invest in a Bear Market Rally (1)
• Social Investing 101 (0)

Tags: 401(k), Business, Finance, Investing, Investment, Mutual fund, pension, Tax

This entry was posted on Thursday, March 26th, 2009 at 9:00 am and is filed under Current Events, Economy, Investing, Life. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.