Managing Money in Your Retirement Account

Managing Money in Your Retirement Account

The nature of the money in your retirement account

Where to invest your money

What's the right mixture of stocks and bonds?

Aren't stocks risky?

Investment options offered by good 401(k) and other plans

Assets that should not be placed in retirement accounts

The nature of the money in your retirement account

Unless you're already near retirement, the money in retirement accounts should be invested for long-term appreciation

Because of compounding, by increasing your return on investment slightly, you can greatly improve your chances to retire comfortably

Where to invest your money

For many employer-provided plans, like the 401(k), the plan administrator determines your investment choices

Many employers offer guaranteed investment contracts (GICs) offered by insurance companies

• GICs are similar to bond investments
• Relatively safe but offer lower returns

Long-term returns from various asset classes

Asset class	Average annual return
Inflation	3.0%
Money market funds	3.5
Long-term bonds	5.5
Stocks	10

Ask your employer to improve investment choices if you can only invest in GICs or your company's own stock

Ask to be able to invest in a variety of stock mutual funds

It's in the employer's best interest to offer good investment choices

If the 401(k) plan offers a variety of asset classes to invest in (money market, bond, stock mutual funds) the plan administrator is off the hook with respect to liability for plan losses

If true choices are available to worker, the worker is responsible for any gains or losses

Investment options offered by good 401(k) and other plans

Remember retirement plans must meet broad IRS rules, but plans vary from company to company

The best companies offer four or more low-cost well managed mutual funds and the ability to switch funds on a monthly or even daily basis

Be careful and don't put more than 10 percent of your retirement money into your employer's stock -- even if your employer allows you to buy the stock at a discount

What's the right mixture of stocks and bonds?

A middle-of-the-road investor saving for retirement should have the following percentages invested in stocks and bonds

Age	Percentage in stocks	Percentage in bonds
30	70%	30%
40	60	40
50	50	50
60	40	60
70	30	70

Note that a typical investor saving for retirement should have the following percentages invested in stocks and bonds

(100 - her age) in stocks

Her age in bonds

Example for a 40 year old with $100,000 in a 401(k) account

Place $60,000 in stocks and stock mutual funds

Place $40,000 in bonds, GICs and bond mutual funds

Aren't stocks risky?

In the short run, stocks prices are more volatile than most other investments

But over the long run, investors are compensated for the risks with higher returns

Many people have too little money invested in stocks

Various studies show that most people invest their retirement money too conservatively

One study showed that only about 30 percent of 401(k) money is invested in stocks

Unless younger people invest a fairly large amount of money in stocks, it is unlikely they will be able to retire comfortably

Stocks involve short-term price risk, but not investing in stocks invites the risk that you won't have a comfortable retirement

Assets that should not be placed in retirement accounts

Limited partnerships or other tax shelters

Municipal bonds

See also "Mutual Fund Investing for Everyone" for more information on managing retirement account money