10/13/2010 7:00 PM ET|
How to build a million-dollar 401k
After a bleak decade for investors and a deep recession, your retirement goals may seem out of reach. But you may have an opportunity to make up ground fast.
Americans, on the whole, just aren't excited about the stock market or investing right now. I can't blame them.
The tech bubble that had us all chasing hot stocks popped more than a decade ago. Since then, recessions, volatility and a go-nowhere market have all but killed the idea of buy-and-hold investing -- buying great stocks and waiting for a run-up -- because you can wait only so long.
In fact, there's been a historic shift away from stocks in the past decade. Many investors have sought the perceived haven of bonds. Many others have stopped funding their retirement portfolios altogether. The national retirement income deficit, or the amount potential retirees still need to save to cover basic expenses and uninsured health care costs, stands at a whopping $4.6 trillion, according to the Employee Benefit Research Institute.
Unfortunately, our needs haven't changed despite the brutal investing conditions. Apart from Social Security, most of us will have only the money we can save, and what we can make by investing it, to rely on in retirement. How much you'll need for a comfortable retirement is a personal call, but it's pretty common to hear you'll need a million bucks in the bank. That number seemed less daunting during the go-go years than it does after the Great Recession.
I'm here to tell you it's still possible. You can build a million-dollar 401k. You're likely going to have to reconsider your strategy, save more and take more risks. But the good news is that investors can look forward to what's shaping up to be the best market environment in a generation.
Havens that aren't
I know you're skeptical. To be sure, these are still scary times. And you're on your own.
The shift to 401k's and other self-funded retirement accounts -- requiring us all to manage our own retirement portfolios -- began in the 1980s. But it's hard to separate it from the context of the past 10 years, which saw the worst stock market performance since the Great Depression. At the same time, Wall Street professionals have given us every reason to believe that growing our stocks is not what the game is about.
It can feel like you've been blindfolded, pushed into shark-infested waters and told to swim to shore.
That's why we've seen the average investor shun risk and embrace bonds.
But with Treasurys yielding just 2.4% a year and inflation expectations nearing 2%, the 0.4% real yield they offer isn't going to get you anywhere near that $1 million goal. Investment-grade corporate bonds aren't much better, offering just 4.5% at the expense of added risk.
That leaves investors with little choice but to seek out higher returns in riskier assets. By that I mean stocks.
The bond binge
Yet vast sums of money continue to be pulled out of equities, with more than $49 billion coming out of U.S. fund groups so far this year. Destination: bonds and bond funds, which have received more than $180 billion in fresh capital so far this year.
Because of this, U.S. household exposure to bonds versus equities has moved to levels not seen since the mid-1990s.
It's been hard to fault this strategy. Since April 2000, the total return for investment-grade corporate bonds is more than 134%; compare this with a 4.8% loss for the Standard & Poor's 500 Index ($INX)including dividends. In fact, thanks to this divergence, bonds have outperformed stocks over the past 30 years on a total-return basis.
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First of all a defined Pension Plan you will be better off with and will paid defined sum of money,each and every month.With 401k or 457k you must control your destiny or you will be destroyed with negative results, its all bull, average person has 65000 in 401k you need well over 3 million to compare to a police or firefighter or teachers or UPS driver. Defined benefit which they almost all contribute to along with a 401k plan over and beyond there pensions, example pension from a teacher is about 75000 to 130000 a yr plus there 401k which most teachers have 100k to 500k in.with 30 yrs of service defined benefit at 75000 is 6250 a month along with say 400k just touching the interest is about 12000 or 1000 a month with todays intrest rate.This is how a 401k should work, u must control it with mutual funds of choice along with a brokerage account to purchase stock that all pays a dividends ucan boost your percent to 20 to 26% a year along with 17000 max and company or city county state fed giving 6% toward the k plan.I personally have increased without touching my prinicple of 700k to 45000 a year in dividends alone, comes to 3750 tax at 15% comes to 3187 a month along with my nice defined benefit of 85000 a year 7083 = 10270 + ss 2147=12417 try to make that up with a 401k u need 3 million min in ur 401k if u retire at 45 to 55 years of age. Rem.DIVIDENDS are the answer.
We don't have no patience, probably due to the fast food places, we want returns NOW. I have to agree with him, 7-8% is about right. Sometimes 8%-10%, not bad if you have the time and guts. If you can't afford to lose 30+% (notice the plus sign) overnight in the stock market, don't invest in it. Keep in mind too, if you make 4.5%, take out your yearly tax rate and inflation, your 4.5 is probably dwindling, right?
I been in since 1987, two crashes and one meltdown (crashed in 87 too, ick!). Buy/hold always worked for me, other stuff, well, it's other stuff. Diversify and evalulate your holds once in a while--don't wait when something happens, it's to late!
Pick your posion; stock, bonds, real estate, annuties, CD's; make sure you have an antidote.
Stick to buying houses it will pay off better in the long run once the rebound hits.
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