Cashing In on 401(k)s

Cashing in on 401(k)s

The need to sidestep major investing land mines late in your career is one reason financial experts say older boomers need to cut back on their allocation to company stock. Hewitt Associates recently found that workers 60 and older hold more of their 401(k) balances in company stock than do those of any other age group, with an average allocation of nearly 28 percent.

Look to improve your investment returns modestly --by 1 or 2 percentage points a year. To reiterate, it's risky to try to make up for lost ground by swinging for the fences. But improving your returns by even a percentage point each year can still help. Remember, if you're 55 and plan to retire at 65, you might not have to touch the bulk of your 401(k) until you're 70 or older. That gives you 15 years or more to invest.

A simple way to find an additional percentage point in gains each year is not to chase the hottest funds (because they have a tendency to cool off once they're noticed). Instead, see if you can find solid investment options that charge low fees, such as low-cost index funds.

Investors often don't realize it, but every percentage point their mutual fund charges in annual expenses comes straight out of their total returns. In other words, a fund that generates 8 percent in market gains but charges 2 percent in annual expenses will deliver real returns of only 6 percent.

Put things on autopilot. Many 401(k)'s now offer so-called target retirement, or life-cycle, funds. These are one-fund solutions that not only invest in a mix of stocks and bonds but automatically rebalance your holdings each year. What's more, as you age, these funds gradually shift you into a less aggressive investment mix.

While target retirement funds aren't likely to be the absolute best-performing choices, they often help investors who neglect their 401(k)'s. Hewitt recently studied 401(k) participant performance in 2003 and 2004. It found that workers who used these target retirement funds earned about 1 to 2 percentage points more in their 401(k)'s during that time than those participants who put together their own mix of stock and bond funds.

Keep money in your 401(k) for as long as you possibly can. If saving more and investing better don't do the job, your other option is to work a bit longer. "Even working two years longer can have a big impact," says Lori Lucas, director of retirement plan participant research at Hewitt.

That's because working longer accomplishes three things: First, it lets you collect a few more years of income, which you can sock away. Second, you don't have to tap that part of your 401(k) that would otherwise have been needed to cover basic living expenses. And finally, it shortens the length of your retirement.

Hewitt recently studied the retirement savings of workers at the nation's biggest corporations--firms that traditionally offer the best benefits packages. It found that workers 55 to 59 who planned to retire at 65 could expect to replace nearly 80 percent of their preretirement income through a mix of 401(k)'s, pensions, and personal savings. But if those same older boomers worked until 67, they'd be likely to replace nearly 93 percent of their salaries.

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