By John Wasik
CHICAGO, Dec 28 You may be waiting to optimize
your retirement portfolio, thinking that you should know what's
going on in Washington and Europe before you act.
However, there are some changes you can set in motion right
now that could make a big difference down the road regardless of
what happens with the fiscal cliff, tax changes and Wall Street:
1. Boost your contribution rate
The longer you wait to contribute, the greater return you
will need to achieve your goals. Thanks to the compounding
effect, the more your contribute, the more you can accumulate
when dividends and appreciation are added.
Raise it as much as you can because even incremental changes
make a huge difference over time. Let's say you're 35, make
$75,000 annually and contribute 6 percent with a 100-percent
employer match. You start with $50,000 in your account now. If
you just bump your contribution rate to 7 percent, your balance
in 30 years would rise from $1.6 million to nearly $1.8 million,
according to 401kcalculator.org. In any case, you always want to
take advantage of the employer match, because it's free money.
2. Align your allocation to your age
Generally, the older you are, the more fixed-income you need
-- roughly matching your bond or guaranteed investment contract
portion to your age. Let's say you're 30 and you can afford to
take market risk. You'd want 30 percent in bonds and 70 percent
in stocks. A 60-year-old, conversely, would consider a 40
percent stocks, 60 percent fixed-income mix.
Target-date or "lifestyle" funds can do this for you, but
you have to check their allocations the closer you get to
retirement to see if you're comfortable with the stock mix. They
are all slightly different.
3. Don't worry too much about taxes now, but have a tax plan
While it's hard to tell what Congress will do with the
fiscal cliff dilemma, no one has talked about eliminating the
tax break for 401(k)-type plan contributions, which are not
subject to federal taxes. You can contribute up to $17,500 in
2013; another $5,500 for those over 50 or for individual
Concerned about taxes down the road? That's reasonable.
Consider a contribution to a Roth IRA or Roth 401(k). The
contributions are taxable, although the withdrawals are not if
you hold money in these accounts for at least five years past
age 59 ½.
4. Lower expenses to boost return
Surprisingly, low-cost index funds accounted for only 30
percent of the assets in top-rated 401(k) plans surveyed by
Brightscope for 2012. Every retirement plan should have index
funds to cover U.S. and international stocks, bonds and real
Here's what you can do if you don't already have that setup:
You probably received a notice earlier this year detailing how
much each investment option is costing you. If any of your
individual funds cost more than 0.75 percent annually, you
should pick a different one.
If you don't have enough options in your company plan, you
can ask your employer to find cheaper index funds, which are
available for as low as 0.06 percent annually. If you do this,
you will easily boost your plan's performance without changing
the risk profile or allocation, and it will also pay you back
every year in the form of a higher net return.
5. Buy constantly and hold
Most people time the market badly. The best time to buy
stocks is during the dips. Most investors can't stomach this
idea, though. At the end of 2008, when stocks were really cheap,
401(k) investors only had 37 percent allocated to stocks, and at
the end of the dot-com bubble in 2002, investors had 40 percent
in stocks, according to the Employee Benefit Research Institute
What you should do is invest during good times and bad. You
have no idea when bull and bear markets are going to start or
stop. So if you can afford to take the risk, take advantage of
the compounding over time.
6. Cut back on your employer's stock
This could be the most dangerous holding in your portfolio,
concentrating a great deal of risk in one company. While you may
feel a need to be loyal to your employer, it's not in your best
interests. You'd be better off diversifying.
Look at what you sectors you don't have represented in your
portfolio. Asset classes that are typically under-represented
include real estate investment trusts, inflation-protected bonds
and global stocks/bonds. Fortunately, only 8 percent of those
surveyed by EBRI hold company stock. If this is still a major
holding in your portfolio, make some changes. This also applies
to holding single stocks.