Best Strategy for Your 401K

The stock market and the economy appear to be vying for first place in the contest for best swan dive in modern history. So far, it appears to be a tie. As a result, shell shocked workers find themselves worried about their jobs as well as paralyzed about what to do with their 401k retirement plan. Seeing your retirement nest egg wither by 40% or more is devastating to the typical worker’s psyche. Here are my recommendations for preparing your retirement nest egg for a major rebound:

  • Recognize that the best defense is a good offense. Historically, when things are at their gloomiest and everyone expects things to get worse is the very time that the bottom is near. At the point where all those who are willing to sell have sold their stocks, you have reached the bottom. All that remains are future stock buyers. While we may not have reached full capitulation yet, we are very close. The next 12 to 24 months will likely prove to be one of the best times to be investing in stocks. 
  • Up the ante. Most people are under-saving. In fact, research shows that Americans are among the poorest savers on the planet with a savings rate of near zero or in many cases, negative. One good thing about this recession is that it has focused people’s attentions on the need for savings. Savings for unexpected financial need, such as the loss of your job. Savings for retirement. Use this economic tsunami as your wake-up call for taking financial responsibility and increase your 401k contribution. At a minimum, you should be saving 10% of your gross income including any company matching contribution. If you are an ‘under-saver’ and in your thirties or forties, consider increasing your savings to 15% to 20%. 
  • Know your number. Too many people ‘invest what they can afford to’ rather than what they need to. The reason? They have never taken the time to calculate how much they need to be investing for their retirement. The reality is that we are capable of doing what we need to do yet many people settle for making poor choices that focus too much on the ‘what I want now’ and not enough on the ‘what I’ll need later’. To do a quick calculation of what your ‘number’ is, go to the Resource Center at and click on ‘Links’, then ‘Retirement Planning Calculator’.
  • What if there’s no company matching contribution? In order to cut expenses, some companies have eliminated their 401k matching contribution. How does that affect your retirement contribution strategy? One of the primary benefits of investing in your company’s 401k is when you receive a matching contribution. This is like free money and you should do whatever possible to take advantage of it. Without the match, I would recommend you fully invest in a tax deductible IRA or Roth IRA before investing in your company 401k plan. The reason is that the number of investment options in a company 401k plan is typically very limited. This is not the case with a Traditional or Roth IRA held at an independent broker such as Schwab or Fidelity.