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Financial Resuscitation: Six Fixes for Your 401(k)

A surging stock market late last year may have breathed some life back into your 401(k), helping you regain some of the ground it lost during the global financial crisis.

Now, the markets are jittery as everyone wonders if the recovery is for real. Once again, you may be feeling unsteady about your employer’s retirement savings plan.

“Let this decade’s rocky start be a not-so-gentle reminder to all of us to make strategic moves with our 401(k) plans,” urges USAA Certified Financial Planner practitioner J.J. Montanaro.

Here, Montanaro looks at some of the lessons learned from the recent economic downturn and recommends six tools for managing your retirement plan.

1. Stop trying to outsmart the market. When people try to guess what the market’s going to do next, they often become their own worst enemies.

Want proof? In the first quarter of 2009, Americans pulled more than $1 billion from investment options that held stocks, according to a survey by global human resources firm Hewitt Associates. Stocks bottomed March 9, 2009, which means many of those people locked in their losses and then missed out on one of the biggest rallies of the past century.

2. Make sure you have the right mix. Some investors may have fled stocks because they didn’t realize just how much risk they were taking—until it was too late.

While stocks have historically offered attractive long-term returns, they also expose you to the risk of big declines. That’s why it’s important to allocate your money across different types of investments.

Building a diversified portfolio is much easier than you think, especially if your retirement plan offers target retirement funds. They’re customized based on your planned retirement date. You simply pick the fund that’s closest to your planned retirement, and the fund manager creates a diversified portfolio that becomes more conservative as your target gets closer.

If your employer’s plan doesn’t offer target funds, USAA’s Portfolio Planner can recommend an investment mix in a matter of minutes.

3. Don’t lose your balance. Over time, your portfolio may start to drift away from its original mix. This is inevitable as the investments that make up your portfolio grow and shrink at different paces.

Let’s say you put 50 percent of your portfolio in stocks and 50 percent in bonds. Next, let’s assume that, over the next year, your stock funds grow by 15 percent while your bond funds lose 5 percent. You’d now have a portfolio that’s 55 percent stocks and 45 percent bonds.

To keep your portfolio aligned with your appetite for risk, it’s important to review and possibly reset your investment mix at least once a year. It’s called rebalancing, and about half of all 401(k) plans can do it for you automatically, according to Hewitt Associates.

4. Pump up the volume. When it comes to saving for retirement, Americans often think their success depends entirely on the economy and the markets. They forget that they control the most important variable of all: how much they’re saving.

The great thing about employer savings plans is that the money is put to work before we ever get our hands on it. Be bold. Increase your contribution rate to the highest level you think you can possibly manage, and you’ll be surprised how little you miss the money. At a minimum, contribute enough to get your employer’s full match. It’s money in your pocket.

5. Bring it all together. If you’ve changed jobs a few times in your career, chances are you’ve got some unfinished business. You need to decide what to do with the money sitting in your former employers’ 401(k) plans.

You can tie up those loose ends by moving your money to an IRA in a tax-free move called a rollover. Consolidating your money with rollovers can simplify your life and give you access to more investment options.

6. Turn it into income. If you’re close to retirement, you face an intimidating challenge: figuring out how to make that money last the rest of your lifetime. As part of a comprehensive retirement plan, consider an immediate annuity.

“An annuity lets you exchange some of your savings for an income that’s guaranteed to last your entire lifetime,” says Montanaro. “At a time when employer pension plans are becoming rare, annuities give retirees a do-it-yourself option.”

Originally published on USAA