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Dec 16, 2007 11:02 am US/Central
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Tune Up Your 401(k)
(WCCO)
It's easy to forget all about your 401(k) plan and with it being the end of the year, now is a good time to see how your investments did this past year.
Buckle up. Christine Brown is going in for a tune-up. Not for her car, but for her 401(k). She has an appointment with a money mechanic, financial planner Nicole Middendorf.
"You have no idea how happy I am to have somebody look at this mess," said Brown as she pulled up to Strategic Financial.
Brown has had a rough ride lately with a divorce and credit debt. Retirement hasn't exactly been a priority for her. Since there is no guarantee that Social Security will be around when 42-year-old Brown retires, she needs to do her own saving.
A computer programmer, Brown's got a great retirement plan at work. Her employer matches forty cents for every dollar she saves. And she's actually socked away a lot of money -- $130,000. Still, she's currently making one of the biggest 401(k) mistakes: She's not contributing.
"The hardest part is just starting," explains Middendorf. "And so you can usually find some money somewhere. Plus too, when you put money in a 401(k) plan, you're paying less in taxes, so it's a double benefit to you."
After looking over Brown's paperwork, Middendorf found money alright.
Brown has a variable life insurance policy that combined insurance and investments. It was eating up $3,000 a year.
"If you were maxing out your 401(k) and doing your Roth and you still had money," she told Brown. "Then this would be an option, but I think we can probably get rid of this."
That single move will free up enough money for Brown to pay down credit cards and start saving for retirement again.
Fortunately, Brown didn't make the second big 401(k) mistake which is taking a loan on your 401(k) plan.
"That's a no-no," explains Middendorf. "It's usually one of the most expensive loans that you could ever take. You really, it's the ultimate last resort is taking a loan on your 401(k)."
The third mistake people make is not opening up and reading their statements.
"What did your 401(k) perform last year? How did you do? Do you really know the answer to that question? If you don't, you really do want to know that answer," said Middendorf. If you only made three or four percent last year, that's not good. Your 401(k) should be making more than that.
You shouldn't check your 401(k) everyday or even every month. That's a problem in itself -- paying too much attention to your plan.
However, at least once a year, look at your 401(k) to see how it's performing and to make necessary changes.
The last big slip-up people make with their 401(k)s? Bad allocation -- too much money in one stock or one type of investment. Remember Enron?
"What if you wake up tomorrow morning and the company's in bankruptcy or what if you wake up tomorrow morning and there's a horrible news report and the stock has dropped 20 percent?" asks Middendorf. "You just have way too much money in one company, and you're putting yourself at too much risk."
Brown's guilty, too.
"You're pretty heavy in international, you've got a lot of money based overseas," noted Middendorf.
After looking at Brown's investments, Middendorf determines that Brown has too much 401(k) money in international stocks, in bonds and in a low interest money market account.
"You really cannot afford to have money in a money market account within your 401(k)," she said.
Middendorf's advice? Make sure your money is spread out among small, medium and large company stocks, international and bonds. Aggressive investors may want to put less in bonds. Those nearing retirement who'll need their money soon should put more in bonds. Middendorf gave us an example of a good growth portfolio:
Large-company stocks: 62% -- value and growth stocks
International stocks: 10%
Mid-cap stocks: 5%
Small-company stocks: 8%
Bonds: 15%
Leaving Middendorf's office, Brown was encouraged.
"I feel really good about it," she said. Having a plan was "helpful, really helpful."
It didn't take long to get Brown back on track. For many investors, a 401(k) tune-up may do more than improve chances of a comfortable retirement. It can help you worry less about money now.
(© MMVIII, CBS Broadcasting Inc. All Rights Reserved.)