During this time of economic uncertainty in the United States economy, there have been major declines in the United States stock market. Over the past two years, we have witnessed the Lehman Brothers crisis, Washington Mutual insolvency, and the Bear Stearns failure. Thousands of employees lost their jobs and saw their entire retirement savings wiped out. Millions of Americans are concerned if their retirement is safe and if they will have enough money to retire. This is a great time to evaluate your overall financial condition and protect your retirement assets. One of the best places to start is by looking at your 401(k).
Are you overly concentrated in any particular asset class?
Does your portfolio contain more than 20 percent of your own company stock? Are you currently on pace to meet your retirement goals? Does your portfolio match up with your age, risk tolerance, and investment horizon?
According to the Financial Industry Regulatory Authority, “One-third of employees eligible to invest in company stock through their 401(k) has more than 20 percent in their company’s stock.” There are valuable lessons that can be learned from each of those tragedies above. You don’t want to lose both your job and retirement savings just because you placed too much trust in your company. Your only defense is diversification. Your 401(k) should contain a mixture of stock mutual funds, bonds mutual funds and cash to truly be considered diversified. Bond income and interest earned on cash savings can help generate positive returns when equity prices are declining.
You are probably thinking, “why should I start a Roth IRA if I already have a 401(k)?” Starting a Roth IRA gives you greater control over the assets that are in your retirement plan. You can place specific stocks, bonds, mutual funds, and certificates of deposits that you like in your account. A Roth IRA will also provide you with tax-free growth. If you are a great investor and can turn $100,000 into $1,000,000, you won’t have to pay any taxes. You are eligible for a full contribution if you are single and your modified adjusted gross income is below $105,000. Joint filers can make up to $167,000 and make a full contribution.
If the topsy-turvy market of the last two years keeps you awake at night, you might want to consider rebalancing your portfolio. Lots of individuals thought that they were risk takers before seeing their portfolios drop 40 to 50 percent. Even corporate bonds have shown that they can be vulnerable to default. Risk-averse investors will want to stick to investments that are guaranteed by the government. Treasuries, government bonds, certificates of deposit, and money market accounts are virtually risk-free investments. The only risk is if the United States government fails.