"Should You Dump Your 401(k)?" is this weeks attention-grabbing cover of Money magazine. Its enough to make plan providers quiver in their boots. After posing this startling question, the magazine says, no.
A major point is made of the fact that retirement investing should be done in macro terms, with your eye on the big picture and resisting temptations of the moment. According to the report, one must "keep in mind that over some 30 years of retirement investing, you'll ride out at least half a dozen presidential administrations, numerous economic cycles and, inevitably, hundreds of tax-law changes."
But in order for investors to rebuild their battered nest eggs, the cover story suggests the following:
· Dont count on a single retirement plan, and within each savings vehicle, remember to diversify. For example, Vanguard 401(k) participants who held bonds as well as stocks limited their losses to an average 6.3% over the past three years, while the S&P 500 fell an average 14.6% a year during the period, Money reported.
· Make the most of a 401(k)'s free money. More than 80% of 401(k) plans offer a match, typically 50 cents on the dollar.
· Diversify for tax purposes, too. Since it is impossible to predict future rates, it is important to use tax diversification by investing both inside and outside your 401(k). With 401(k)s, you put in pre-tax dollars and the earnings compound tax-free until withdrawal, when the money is taxed at ordinary income tax rates. These rates are subject to fluctuation, hence the need for diversification.
· Avoid needlessly locking up your money. According to Money, some financial planners suggest that if the dividend tax break proposed by President Bush is enacted, it might be better keeping some assets in a taxable account.