401K » Retirement Plans

Despite the best of intentions, 50% of all marriages end up in divorce. Often, the effect is devastating on a variety of levels including the household finances, the emotions of spouses and their children, friends and relatives. A divorce is not as simple as just dividing up the music collection and figuring who gets the family pet, it is figuring out a clean and equal distribution of assets accrued by a number of means during the length of the relationship. One such asset that will often get divided is a 401k investment strategy.

401k Assets Divided

Investment instruments come in a variety of shapes and sizes, and it can be extremely difficult not to feel overwhelmed by the full array of options. Many companies offering 401k benefits to their employees help to streamline the process by choosing one 401k management company to select the investment options that the 401k portfolio can then be diversified into. Even with this more narrowed choice of offerings, it is still possible to be overwhelmed by the plethora of instruments that can be utilized.

Understanding 401k Options

When everyone starts feeling the pinch of a failing economy, 401k’s are longer safe. Whether you are experiencing the loss in thousands or tens of thousands, it is times like this that people may panic and try to abandon the sinking ship that they used to call their “retirement portfolio.” However, there are better ways to react and ultimately salvage your ailing 401k investments.

Handling a Losing Portfolio

Workers contributing to their 401ks will be happy to know that their contribution limit won’t change this year. Typically, the contribution limit adjusts to the conditions of the economy. Since the economy is in a deflated state, economists thought the IRS might lower the limit for 2010. However, it appears that the limit will sit still be at $16,500 for the year.

This is not the first time that the limit has not adjusted in one direction on the other – from 2007 to 2008, the limit was unchanged as well. However, since the limit was calculated based on a comparison of the cost of living index in the quarter ending September 30, 2009, to that of the same quarter in 2008 – and that time period marked the beginning of the worst financial crisis since the Great Depression – everyone expected the contribution limit to decrease.

If you’re one of the millions who lost part of your 401k savings in 2008, you probably don’t need any expert to tell just how bad it was; however, times are getting better. According to recent information released by the Employee Benefit Research Institute and the Investment Company Institute, many investors have been able to recoup what they lost.

The reason times are getting better is because the S&P 500 has been on a pretty steady incline in the past few months. Additionally, investors have continued making contributions to their 401ks despite the financial crisis that hit them hard last year.

When the economy starts to dive and the prices of securities and other assets start to fall, investors need to be proactive in implementing investment strategies in order to insulate themselves from a true bear market. One investment instrument that you should pay special attention to is your 401k. Here are some steps to recession-proof those investments:

1. Find safe investment harbors. Those who are prudent in their savings strategies may want to seize this moment to invest in bonds. Federally issued bonds are low-risk, guarantee a rate of return and are considered one of the most simple ways to diversify an investment portfolio. The yield rate for savings bonds is just enough to hedge out the average inflation rate of 3%. What you will be giving up as far as a high yield will be more than made up for with peace of mind.
2. Buy more shares. One great thing about the market decline is that some choice stocks are now more affordable to the average investor, and that includes dividend stocks. Dividend stocks are like traditional stocks, but with the added boost of yields that can be physically distributed to investors when they occur. Because the prices of those instruments are fairly low, recessions are a good time invest so when the market does improve, you will be able to get a little more cash on the side.
3. Buy inverse ETFs and other commodities. Investors may also be able to recession-proof their 401k plans by investing into funds that actually thrive in bear market conditions. Some of the funds are compromised of gold (which tends to increase in value as the dollar declines) and derivatives to short the S&P 500 Index. Strengthen your 401k even further by investing in leveraged inverse funds as they are constructed to profit from a market decline (based on the value of its chosen underlying benchmark).

If you work for a company that offers a 401k retirement plan, and you participate in it, you may be getting company stocks as part of the deal.

If you are, you could also see those company stocks get special tax treatment. The company stock you have in your 401k plan requires some special consideration should you be moving to a new company, or thinking about rolling over your 401k funds into an IRA. 

Companies that offer their stock as part of their employees’ 401k retirement funds do so because the employees will receive special tax treatment for these stocks. So, let’s say you buy $50,000 worth of company stock as part of your 401k. You then decide to rollover your 401k money into an IRA.

Nobody is perfect and everyone makes mistakes. Whether it is accidentally forgetting the sugar in a chocolate cake recipe or hitting the curb when parallel parking, it is human nature to blunder every now and then.

Some mistakes, such as mismanaging your finances, occur at a greater cost then others. By avoiding some common 401k mistakes, you can help mitigate your chance of a serious financial fault from occurring.

Mistake 1: Not taking advantage of your company’s 401k

Regardless if you quit, were laid off or fired, there are several options of what to do with your 401k investments if you part ways with your employer.

Depending on the terms of the 401k disbursements from your company regarding vested distributions, you should be entitled to take the entire enchilada and you can choose to do so in a number of ways.

Option 1: Leaving your money as it is

Most Americans plan for retirement by investing into a 401k plan.

But the investment is not like others, you will be heavily penalized if you try to withdraw the money earlier than retirement age. In some cases, your money cannot be accessed at all expect in extreme hardship cases such as medical emergencies, educational expenses or payments necessary to prevent eviction or foreclosure and proof needs to be provided.

However, if you are fortunate enough to have a non-hardship withdrawal clause in the terms of your 401k agreement, you got a lucky break.