Compensating for a Lousy 401k


My husband is 52 years old. I no longer work because of a disability. His 401(k) doesn't offer very good mutual funds. His employer provides a 6% match, though. We only have about $68,000 in it. Do you have any thoughts about how we should invest for the next 10-13 years? We have no additional savings--no stocks, IRAs, or other funds--just a few thousand in a savings account. We are losing our gains (over $2,000), so I just moved 50% to a money market and 50% to a bond fund (PTTDX). I worry that we will not do well in our retirement years. I just don't know what to do.

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Your situation involves several issues I'd like to address.

First of all, I frequently hear about people with poor 401(k) choices. While a plan's participants may petition for improved investment options, often no changes are made. The silver lining in your case, however, is the employer's 6% match, and you should strongly consider taking advantage of it by contributing the full 6%. Beyond that, you might want to look into investing additional retirement funds in a Roth IRA. Since your husband is over 50 years old, he can contribute up to $3,500 in 2004, a bit a higher ceiling than the $3,000 limit for those younger than 50. (I'm assuming your income doesn't exceed $160,000--when Roth IRA contributions are not allowed.) Also, even though you are not working you may be eligible to contribute to a "spousal IRA," which is merely a special exception to the rule that says you must have earned income to contribute to an IRA. One of the advantages of investing outside the 401(k) is a much wider range of investment options. That may partially compensate for poor 401(k) choices.

The second part of your question I want to address is this: With only $68,000 put away for retirement, you should think about ways you can save more, including either retirement plans or taxable accounts. I know finding ways to save can sometimes seem like trying to squeeze blood from a turnip, but it's very important that you take a fresh look at your expenses. See if you can free up additional savings by cutting out extras--basically anything that isn't completely necessary. You don't have to get extreme about cutbacks, but you should try to find a balance between living well now and having the savings to live well later.

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Finally, I understand that sometimes it's tempting to just give up on the stock market and just choose "safe" investment alternatives. But the reality is that this strategy is risky, too. If your savings don't grow over the next 30-40 years (not just the years until retirement--include the years you will live in retirement, too), you'll eventually have a heck of a time making ends meet. While you may think that you are safe in bonds, you may be in for an unpleasant surprise: As interest rates rise, the value of bonds decline. For some basic lessons on asset allocation (a mix of cash, bonds and stocks), take a look at "Model Portfolios for Retirees." While this article was written for people who are already retired, you can still use it to find a mix of assets that is comfortable for you. My advice would be to focus on the Conservative to Balanced Portfolios first. That would mean an allocation of 35%-50% stocks. See how that goes. You can always fine-tune your allocation later.

Source: 09-2004

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