No matter what your age, making contributions into a 401(k) plan is a good idea that will pay dividends when you reach retirement age. The recent recession has had a huge impact on the 401(k) balances of people in all age groups, but those who are closer to traditional retirement age may feel those losses more acutely as they struggle to reclaim the fat balances they saw in the 2003-07 bull market. No matter what your age, there are strategies that can help you even the odds and regrow your savings in time for retirement.
401(k) for Your 20′s
If you’re in your 20s, you may not have given much thought to your retirement at all, and fixed expenses such as rent, bills and student loans may eat up whatever discretionary income you can scrape together. However, people in this age group stand to gain the most from even a small 401(k) contribution, simply because time and accruing interest are on their side. Experts say that a 25 year old who can afford to contribute $5k to an IRA annually, stands to accumulate $1.6 million by the age of 70 (assuming a 7% interest rate every year). If your employer makes matching contributions, that’s even better.
401(k) for Your 30s
If you’re in your 30s, the good news is that you still have time to make up for market losses with new savings and, as the market rebuilds itself, you stand to gain from buying stock at bargain basement prices. Now is the perfect time to build a diversified portfolio that can withstand shifts in market weather.
401(k) for Your 40s
If you’re in your 40s, you might want to invest somewhat more conservatively, preserving the savings you have while continuing to build your nest egg. One rule of thumb is to subtract your age from 110 and allocate that percentage of stocks, while keeping the remainder in steadier bond investments which will provide a more stable 401(k) return. It’s also a good idea to set up a separate emergency fund that can provide a prudent reserve, so you won’t need to dip into your retirement for unexpected emergencies, such as a job loss or unforeseen medical bills.
401(k) for Your 50s
If you’re in your 50s, you may have seen a sharp drop in your 401(k) balance this year and are feeling the need to make some immediate corrections. The good news is that, if you are over 50 and your employer allows catch-up contributions, you can contribute an extra $5,500 a year into your 401k every year after age 50. In addition to growing your nest egg, these contributions will be tax-deferred until retirement (when you will most likely be taxed in a lower income bracket).
401(k) for Your 60s
If you’re in your 60s, you might want to consider deferring your retirement by a few years, maybe even to age 69 or 70. Experts advise that it will take a year or two to get your portfolio balance back up to where it was, depending on how conservatively you invest over the next two years. Social security payouts will also increase the longer you delay claiming them, by about 7% or 8% per year. That’s a better rate of return than most stock investments are enjoying right now!
401(k) for Your 70s+
If you’re in your 70s, you won’t have a lot of options to recoup any losses on the market. However, if you can get by without tapping your 401(k) for a year, the Worker, Retiree and Employer Recovery Act will waive the minimum distribution excise tax in 2009, allowing you to protect what assets you have.
What age group are you in, and how much are you contributing to your 401(k)? Has the massive decline in 401(k) portfolios curbed your appetite for risk?