Re:Money Tips down2basics: "Putting all your eggs in one basket" can be a huge mistake. Huge. Look at the experience of the 58-year-old Lucent employee chronicled in Money magazine. This poor guy had $400,000 in his 401(k) in early 2000 and was planning to retire in 2003. His assets weren't diversified in the least — 90% of the money was in Lucent stock, which proceeded to tumble, and tumble again. By the end of 2001 his balance had dipped into the five-figure range. And there was nothing he could do about it but keep working.
The key to your 401(k), like the rest of your portfolio, is diversification — investing in a wide range of instruments to spread out your risk, so that if one particular stock or one investment class has a rough year, the other things you own will keep you afloat. In addition to making sure you're diversified overall, keep your company stock to 10% of your retirement accounts.
Re:Money Tips down2basics: The number of bounced checks is up to more than 125 million a year, according to Bankrate.com. And each of those infractions is likely costing consumers $20 to $35 a pop, according to the latest research from the Consumer Federation of America. The need to avoid these charges makes overdraft protection—a service that protects you against bouncing a check—a very attractive option; just make sure you know what it's costing you. Ask your bank not only about the interest rate (most overdraft protection comes in the form of a credit line) but whether there are fees or transaction charges involved. According to BankRate, interest rates on such a line of credit may be 18% or higher, and some banks charge annual fees of $15 to $20 for the service.
Re:Money Tips down2basics: When you combine broker's commission, mutual fund management fees, the money you pay to your accountant, and taxes, the average investor loses 5 percent to 10 percent of the total value of their investments year in and year out, according to my colleague Jason Zweig at Money magazine. One great way to trim those expenses: Buy an index fund. These typically have lower expense ratios than actively managed mutual funds, because they're not compensating a manager to make choices trying to outperform the market. And since they buy and sell shares less frequently, there's less of a tax impact on you.
Of course, be sure to pick an index fund that's appropriate for your risk tolerance and your portfolio. Long-term investors in their twenties or thirties may prefer a index fund that tracks the U.S. equity markets, while those who are closer to retirement should probably opt for bond index funds. Below are four of the most commonly tracked indexes:
* Standard & Poor's 500 Stock Index, which covers the largest companies in the United States.
* Russell 2000 Stock Index, which tracks small-sized U.S. companies
* Wilshire 5000 Stock Index, the broadest index covering large, medium and small U.S. companies
* Lehman Brothers Aggregate Bond Index, the most widely known bond index covering the total U.S. taxable bond market
Re:Money Tips down2basics: In your 30s and 40s, you are eight times more likely to become disabled before you retire than you are to die, yet America still hasn't woken up to the fact that disability insurance is a necessity. What do you need to do?
* Check your employer's coverage: First, check and see if you have any coverage at work. The goal is to get coverage that will replicate 60 percent of your income. If you have some insurance at work, but not that much, call an insurance agent about buying more.
* Hammer out the details: It's best to buy "own-occupation" coverage, which will pay you as long as you can't work in your own occupation. Less desirable policies will pay you only if you can't work at all—you're a surgeon who can no longer operate, but could work at a hardware store, you'd be out of luck. Own-occupation coverage tends to be pricey, so you'll want to cut your premiums in other ways. One is to opt for a 90-day waiting period before coverage kicks in. This is a pretty safe move as long as you have a three-month emergency cushion that could tide you over.
* Buy: As with life insurance, you want to make certain you're buying a policy from a company that has its financial ship in order. You want a carrier rated A or better by S&P, Moody's, or A.M Best.
Re:Money Tips down2basics: Borrowing from a retirement account seems simple enough, but most people don't realize the full ramifications of such an arrangement. First, there's the matter of double taxation. The money in your account is "before-tax" dollars. If you take a loan, you will repay with "after-tax dollars." When you withdraw those same dollars in retirement, you'll pay taxes on them again. Then there's the matter of life's uncertainty. If you leave your employer for any reason before the loan is repaid, the entire balance will immediately become due. If you can't repay the money, the loan balance will be converted from a loan to a cash withdrawal. You'll get socked with a 10 percent penalty plus the IRS and state tax collector will be knocking on your door to collect taxes on that amount. And if that's not enough, you must consider the potential loss of investment growth during the period of time you've removed money from the account. Overall, borrowing from your 401(k) is so troublesome, it should be seen as your last resort, not the first.
Click More for the next page.
