One Way to Rebuild Your Battered 401(k)

A year ago, at about the time many investors would normally have done a regular reassessment of their 401(k) plans’ asset allocations, the markets were in too much chaos to make the exercise practical. But now it’s time to face reality. How can you rebuild your 401(k)?

The good news is that you can recover from sizable losses, even if you’re approaching retirement.

The bad news is that you only have a few options for recovering. You can save more, invest more aggressively or work longer. The easiest option is to work longer.

Savings certainly matter – but for many of us, saving more isn’t a viable option because we’re strapped as it is.

If you plug figures into the Fidelity Financial Engines model, you’ll find that working longer is the best way for a 50-year-old Average Joe to get a 401(k) back on track.

If Average Joe had a $500,000 portfolio, was contributing $1,000 a month to his 401(k), and was planning to retire at age 65, the model determined that increasing his savings by $100 a month or changing his investment mix from 70% stocks and 30% bonds to 60% stocks and 40% bonds helped only a little.

But if Average Joe worked until age 67 instead of 65, it would have a dramatic effect.

According to the analysis, 50-to 60-year-olds can get their 401(k) plans back on track after recent stock market losses without any additional savings if they work just two or three more years.

The Pros and Cons of Investing in an Index Fund

Popular investing wisdom holds that index funds generally perform as well as the market and have lower expenses than traditional mutual funds – but is that true?

An index fund seeks to match the returns of a specific index by holding all – or in the case of very large indices, a representative sample – of its securities.

Since the stocks in an index change infrequently, the stocks in the index fund also change infrequently.

Why do people use index funds?

For the past 50 years ending on December 31, 2008, the U.S. stock market, as represented by the S&P 500 Index, provided investors with an average return of 9.19% per year.

Some investors earned more than 9.19%, while others didn’t fare as well.

So some investors figure that it’s better to imitate the index – and hopefully obtain similar returns – than it is to try to beat the index.

The downside to index funds, however, is that they perform similarly to the market not just when the market is up but also when the market is on a downswing.

They can also underperform the market due to expenses and the percentage of their portfolios held in cash.

For some investors, index funds may be a good choice.

They often have lower expense ratios and less portfolio turnover – and thus fewer capital gains taxes – than do traditional actively managed funds.

And because they imitate the market, they usually perform similarly to it.

One thing to keep in mind, though, is that past performance is no guarantee of future results.

Index returns assume reinvestment of all distributions and do not reflect any fees or expenses.

What type of fund is best for you?

The best course of action is to consult a financial advisor who is familiar with your circumstances and goals and who can give you more personal guidance.