On the Money: How to Use your 401(k)

(0:58) Jobs report and Economy; Always something to Worry About

(4:10) Investor Behavior

“The gap between people’s expectations and reality is what causes stress, and it’s the stress that causes people to take actions that destroy their financial plans or investment outcomes.”

Paul A. Ruedi

(7:45) How to use your 401(k) Plan

“According to data from the US Government Accountability office, nearly half of Americans (48%) over age 55 had nothing in a 401(k) or similar account.”

Paul A. Ruedi

“Social Security was never designed to be (100% of someone’s retirement income), it was meant to be an assistant or crutch – a component of your many sources of income in retirement. We are seeing many more folks today relying on it for all of their retirement income as they get to retirement age.”

Ryan Repko, MBA, CFP®

(16:37) Get the Full Employer Match

“There is a good amount of employees of companies that offer a match up to a certain percentage of income and they contribute nothing. That’s just free money you are giving up.”

David Ruedi, CFP®, RICP®

“Sometimes people will have 401(k)s that have poor investment options or high expenses – if that is the case it still makes sense to pick up that free money and contribute enough to get the match, but maybe no more. You always have the option, 401(k)’s aside, of investing in an IRA or Roth IRA yourself and keeping costs lower and having more control over your investment options.”

David Ruedi, CFP®, RICP®

(19:14) Listener Question: The federal debt is increasing rapidly, and I cannot see how my dollar is going to hold value as debt exponentially grows. How will the debt impact my investment 5 years and beyond?

(28:58) Choosing the right Asset Allocation in your 401(k)

“If you’re putting money in a 401(k) – by definition it is money you aren’t going to touch before age 59.5. So because of that, temporary declines can’t hurt you, so there isn’t really a reason not to be 100% stock (using mutual funds or index funds).”

David Ruedi, CFP®, RICP®

“For a young person, it is more risky to build a portfolio that doesn’t have a high expected return. If you are too conservative you will probably never be able to accumulate the wealth you need to accumulate.”

David Ruedi, CFP®, RICP®

“As a younger investor, bonds are an irrational investment.”

Ryan Repko, MBA, CFP®

“At least 5 years out – you want to start shifting your portfolio more towards where you want it to be during retirement. Hopefully you have a retirement plan at that point, if not that is really good time to build a more comprehensive retirement plan. That’s going to tell you in retirement maybe I’ll have 60% stock 40% bonds. When you start withdrawing money that’s when bonds play an important role – to dampen fluctuation and be a source of withdrawals during temporary declines. If you know you need to get to 60% stocks 40% bond and you are 100% stock now – start shifting towards that in equal increments over the following years.”

David Ruedi, CFP®, RICP®

(36:20) Listener Question: Instead of bonds, can I shift my portfolio towards dividend paying “Blue Chip” stocks as I approach retirement?

“One person’s idea of blue chip dividend stocks in 2007 would have been bank stocks. I saw people do it one after another – say “look at the yields in these largest American bank stocks” – only to see that dividend tumble by 80% or so.”

Paul A. Ruedi

“I think you’d be better off using a 100% stock portfolio and just taking a conservative withdrawal. People focus on dividends like they are this magical thing you get for free. But when a company pays a dividend, its stock price drops by the amount of the dividend that was paid. So let’s say you have a 100% dividend stock portfolio that pays 4% in dividends – that is not any different from having a 100% stock portfolio and withdrawing 4% of the balance. You end up in the exact same place, but the divided portfolio is a less diversified portfolio and therefore a riskier portfolio.”

David Ruedi, CFP®, RICP®

(48:27) Building a low-cost, diversified portfolio in your 401(k)

“We are seeing more employers offer lower-cost options like index funds, but we still see plans with fund options with costs north of 1%. And though 1% doesn’t seem very high, in today’s world you can invest for much less than that, say 0.09%.”

Ryan Repko, MBA, CFP®

(49:21) Roth vs. Traditional.

“There are two situations when it is obvious. What it comes down to is if your tax bracket right now is lower than it will be in the future when you are pulling your money out. If it is your first job, chances are that is the case, and you’re better off with a Roth. Now if you’re a doctor making a few hundred thousand a year, you are probably better with Traditional.”

David Ruedi, CFP®, RICP®