Your Rich Retirement Roadmap
Dear Wealth Watch Reader,
Market chop has many worried and emails are flooding my inbox with questions about protecting 401(k) assets.
Today I break down exactly how you can beat the bear and retire richer than you’ve ever imagined.
Read on below…
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Bear Spray for Your 401(k)
If my email inbox is any indication, a whole bunch of Americans are worried — very worried — about what a bear market will do to their 401(k) accounts.
That worry is natural, since 401(k)s are one of the most valuable assets (second only to their homes) that people own. According to Fidelity, the average 401(k) balance is $97,700.
As you know, “averages” can be deceiving. The older you are, the higher the balance in your 401(k).
- Ages 20–29: $9,900
- Ages 30–39: $38,400
- Ages 40–49: $91,000
- Ages 50–59: $152,700
- Ages 60–69: $167,700
- Ages 70–79: $160,200.
Older workers tend to make more money than younger workers, and a couple extra decades can make all the difference in the world. But one of the most important but overlooked differences is what percentage of your pre-tax income that you save.
- Ages 20–29: 7%
- Ages 30–39: 7%
- Ages 40–49: 8%
- Ages 50–59: 10%
- Ages 60–69: 11%
- Ages 70–79: 12%.
Watching your portfolio bounce around is unnerving at any age, but the best move you can make if the stock market takes a nose dive is to increase the amount you put into your 401(k).
If you’re still 10, 20 or more years away from retirement age, the best thing that could happen to your 401(k) is for the stock market to get clobbered because the same $100 or $500 or $1,000 a month that you are socking away will buy more shares.
Buying Low Is Always a Good Idea
By simply increasing your contribution toward a distressed asset, you will continually be buying low until the stock market finally bottoms out and bounces.
Think of it this way: Would you rather own 80 shares of Google or 100 shares of Google?
The more the better… right? Which is why I believe the best way to accumulate a BIG pot of retirement funds is to increase your 401(k) contribution during bear markets. Take advantage of stock prices when they are depressed even if it makes you feel uncomfortable.
Sure, the normal reaction is to sell — not buy — but that is why you need to mentally prepare yourself ahead of time.
Caveat! That advice is for people that are 10, 20 or more years away from retirement. If retirement is right around the corner for you, the advice is completely different.
If you’re going to retirement in less than 10 years, here is what you should do:
Load up on Low Beta: Everybody loves volatility when the stock market is going up, but risk becomes a four-letter word during bear markets. Take a look at the mutual fund/ETF options in your 401(k) and load up on funds that have a beta less than 1.00.
A fund with 1.0 beta has historically moved in 100% tandem with the S&P 500.
However, a fund with a beta of 1.2 has historically delivered 120% of the return of the S&P 500. If the S&P 500 goes up by 10%, a 1.2 beta fund will go up by 12%, or 20% more.
The same, however, also applies to the downside. That same 1.2 beta fund will lose 12% if the S&P 500 drops by 10%.
Make sure you own some “defensive” funds that have a beta well below 1.0, which typically own a lot of utilities, consumer staples, health care and dividend-paying stocks.
Defense Wins Championships: A simple strategy to reduce risk is to be less exposed to the stock market by increasing your allocation to bonds and/or cash. Instead of being 100% invested in stocks, consider reducing your allocation to 50–70% and transferring the difference to bonds and cash.
One popular guidance is to subtract your age from the number 100 and that’s the proportion of your assets you should hold in stocks. Thus a 30-year-old should put 70% of his 401(k) in stocks, while a 60-year-old would have 40% in stocks.
However, there is no such thing as a one-size-fits-all formula and that age-old guideline is becoming a bit outdated because we are living longer. I think that it makes more sense to base your stock allocation on 110 or 120 minus your age instead.
If all this financial stuff bores you to death, you could instead invest in a “target date” or “lifecycle” fund.
A target date fund operates under an asset allocation formula that assumes you will retire in a certain year and automatically adjusts its asset allocation model as it gets closer to that year.
The target year is identified in the name of the fund. So, for instance, if you plan to retire in or near 2030, you would pick a fund with 2030 in its name. Vanguard, for example, offers target dates for funds in five-year increments starting from 2020, 2025, 2030, 2035, 2040… up to 2065.
There are lots of target date funds to choose from. In addition to Vanguard, Fidelity, T. Rowe Price, BlackRock, Principal Funds, Wells Fargo, American Century and Northern Trust also offer them.
Here’s to growing your wealth,
Chief Income Expert, Mike Burnick’s Wealth Watch