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How Should I Manage My Retirement Plan?Employer-sponsored retirement plans are more valuable than ever. The money in them grows tax deferred until it is withdrawn at retirement. Distributions from a tax-deferred retirement plan, such as a 401(k) plan, are taxed as ordinary income and may be subject to an additional 10-percent federal tax penalty if withdrawn prior to age 59 ½. And contributions to a 401(k) plan actually reduce your taxable income. But figuring out how to
manage the assets in your retirement plan can be confusing, particularly in
times of financial uncertainty. Conventional wisdom says
if you have several years until retirement, you should put the majority of your
holdings in stocks. Stocks have historically outperformed other investments over
the long term. That has made stocks attractive for staying ahead of inflation.
Of course, past performance does not guarantee future results. The stock market has been
extremely volatile lately. Is it a safe place for your retirement money? Or
should you shift more into a money market fund offering a stable but lower
return? And will the instability
in the markets affect the investments that the sponsoring insurance company uses
to fund its guaranteed interest contract? If you’re participating
in an employer-sponsored retirement plan, you probably have the option of
shifting the money in your plan from one fund to another. You can reallocate
your retirement savings to reflect the changes you see in the marketplace. Here
are a few guidelines to help you make this important decision. Consider Keeping a
Portion in Stocks In spite of its
volatility, the stock market may still be an appropriate place for your
investment dollars — particularly over the long term. And retirement planning
is a long-term proposition. Since most retirement
plans are funded by automatic payroll deductions, they achieve a concept known
as dollar cost averaging. Dollar cost averaging can take some of the sting out
of a descending market. Dollar cost averaging does
not ensure a profit or prevent a loss. Such plans involve continuous investments
in securities regardless of the fluctuating prices of such securities. You
should consider your financial ability to continue making purchases through
periods of low price levels. Dollar cost averaging can be an effective way for
investors to accumulate shares to help meet long-term goals. Diversify Diversification is a basic
principle of investing. Spreading your holdings among several different
investments (stocks, bonds, etc.) may lessen your potential loss in any one
investment. Do the same for the assets
in your retirement plan. Keep in mind, however,
that diversification does not guarantee against loss; it is a method used to
manage risk. Find Out About the
Guaranteed Interest Contract A guaranteed interest contract offers a set rate of return for a specific period of time, and it is typically backed by an insurance company. Generally, these contracts are very safe, but they still depend on the security of the company that issues them. If you’re worried, take
a look at that company’s rating. The four main insurance company rating
agencies are A.M. Best, Moody’s, Standard & Poor’s, and Fitch Ratings.
A.M. Best ratings are based on financial conditions and operating performance;
Fitch Ratings, Moody’s, and Standard & Poor’s ratings are based on
claims-paying ability. You should be able to find copies of these guides at your
local library. Periodically Review
Your Plan’s Performance You are likely to have the chance to shift assets from one fund to another. Use these opportunities to review your plan’s performance. The markets change. You may want to adjust your investments based on your particular situation. © 2003 Emerald Publications
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