Investing in your 401(k) plan, investing in yourself, the reality of investment returns and what you need to do about it

Tough decision?

Conventional wisdom says saving for retirement must include a good portion of equity investments, especially for individuals many years from retirement and that may be true.  However, as an example, here is a look at the actual performance of a group of funds making up the options in a large 401(k) plan.  Note especially the performance over the last ten years and the relative small variance among the funds.  Granted another ten-year period may tell a different story. During a period in the 1980s the Stable Value fund was returning up to 16% a year and during another period equities were flying high.  Nevertheless, the 401(k) investor must balance a good return with a measure predictability and stability especially within ten years of retirement.  As we have seen in the last three years, the unthinkable can happen and those who are not well diversified and those who do not make investment adjustments according to their retirement plans can suffer greatly. 

If you are depending on 401(k) or IRA savings to fund your retirement, you should (1) determine the amount of money you will need in a lump sum (25 times the annual amount you need to live on is a good rule of thumb), (2) determine the maximum amount you can save (a minimum of 10% of each years income is essential), and (3), based on the estimated amount you can save and your goal determine what return you need on your investments to meet that goal. Then invest as conservatively as possible for the best chance to meet your objective over time.  That may help you better sleep at night.  The most important thing is to know your real goal and establish a realistic plan to achieve that goal. 

To obtain a different perspective on how much money you will need, obtain an estimate of how much you will required to purchase an immediate life annuity for the amount of income you want in retirement.  You can do that by visiting   Here is an example, if you are 65 years old and want a guaranteed monthly payment of $5,000 for your life, you will need approximately $827,711 to purchase such an annuity (varies by state).  You will need even more to provide a survivor benefit for a spouse.

Don’t make the mistake of thinking you can live on 20 or 30% less in retirement than you do today.  While some expenses may go down, others will increase, especially health care expenses.  Property taxes or rent will continue to increase. You still have to eat and those 5:00 PM early bird specials get old after a few years.  In addition, unless you plan to sit at home and watch Everybody Loves Raymond reruns all day, you will want money to do stuff.  This may be counter to many experts advice, but take it from someone who is retired, you want to shoot for 100% replacement of your pre-retirement income and you must plan for the ongoing living expenses for a surviving spouse and you must plan for the impact of inflation (yes, there will be inflation again someday).  If all this is overwhelming, get help, it is that important. 

Don’t look to the past for examples, the future is different like never before, the world is changing and it’s time to get your head out of your gluteus maximus and get a plan, take action and execute it.

  Average Annual Returns (as of 11-30-2010)          
1 Year 3 Years 5 Years 10 Years
Mixed Portfolios            
Conservative Portfolio 7.90% 1.30% 4.10% 4.50%    
Moderate Portfolio 9.10% -0.70% 3.70% 4.30%    
Aggressive Portfolio 11.50% -2.30% 3.20% 4.10%    
Stable Value            
Stable Value 3.90% 3.90% 4.20% 4.50%    
Diversified Bond 6.20% 5.30% 5.50% 5.70%    
Large-Cap Equity            
Large Company Stock Index 9.80% -5.80% 4.80% 4.50%    
Mid-Cap Equity            
Mid-Cap Index 24.90% -1.60% 3.20% 1.90%    
International Equity            
Institutional Developed Markets Index 1.10% -9.10% -1.70% 4.30%    
Small-Cap Equity            
Small-Cap Index 28.00% 0.90% 3.90% 7.40%    
Company Stock            
  2.30% -10.20% 3.10% 7.90%    
Target Retirement            
Target Retirement Income 7.40% 3.00% 4.90% N/A    
Target Retirement 2010 8.70% 0.60% N/A N/A    
Target Retirement 2015 9.30% -0.30% 3.80% N/A    
Target Retirement 2020 9.60% -1.10% N/A N/A    
Target Retirement 2025 10.00% -2.10% 3.10% N/A    
Target Retirement 2030 10.30% -3.00% N/A N/A    
Target Retirement 2035 10.50% -3.50% 2.50% N/A    
Target Retirement 2040 10.60% -3.40% N/A N/A    
Target Retirement 2045 10.60% -3.50% 2.70% N/A    
Target Retirement 2050 10.60% -3.50% N/A N/A    

One comment

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