Your 401(K): Should You Be More Aggressive
By Saghir Aslam
Rawalpindi, Pakistan


(The following information is provided solely to educate the Muslim community about investing and financial planning. It is hoped that the Ummah will benefit from this effort through greater financial empowerment, enabling the community to live in security and dignity and fulfill their religious and moral obligations towards charitable activities)

More people than ever are using 401(k) plans to save for retirement but just reaching your employer match enough?

The proliferation of 401(k) retirements accounts, combined with the large reduction is companies pensions, dramatically changed the way Americans save for retirement. Instead o relying on employers to fund their retirement, workers are more responsible for their own savings. The upside is that they gained a say in how much they contribute and how their money is invested.

The numbers of active participants is defined contribution plans, which nearly double the number from 1992. Over the same time period, the number of participants in defined benefit plans, such as pensions, was essentially unchanged. With so much responsibility in their hands with a 401(k), employees now have to make strategic decisions; including determining how aggressive they can afford to be in building retirement savings.

Consider long-term aggressiveness

Being aggressive may pay offer for 401(k) participants who invest in more stocks than bonds, but investors who are within five to 10 years of retiring may want to act more conservatively, because that 401(k) is money they’ll need to tap into in the near term and don’t want to lose, he adds.

Denning points to some numbers to show the impact of trending aggressively. The 20-year old mean total return on a balanced, conservative allocation of 60% U.S bonds and 40% U.S stocks from 1976 to 1996 was 706%. That figure rises to 8% when you reverse the balance, with 40% bonds and 60% stocks.

And while the difference may not seem like much, a rapidly rising or falling stock market can dramatically affect returns in one year. In 2012, the same balanced, conservative allocation had a return of 8.9%, while the balanced aggressive allocation had an 11.3% return. But in 2008, being aggressive would have lost you 20.2%, while the conservative route would have resulted in loss of 11.7%, according to an analysis of the market.

What really boils down to is how much home work you must look your over all finances for example, is your no paid for per, do you still make mortgage payments?. Do you have income from rental properties? You need to take necessary steps in order to be successful. For example you need to choose a financial planner that in itself is a task that you need to take very seriously. There are lot of people out there with license to be financial adviser, what you want to look at is not just credentials of the investment adviser  but you also want to see his experience and do not forget to ask for references. Do not just file references you need to take action that means calling the clients he gave you as reference and pick their brain and get all the information. 

I will elaborate more on financial adviser in another article.

(Saghir A. Aslam only explains strategies and formulas that he has been using. He is merely providing information, and NO ADVICE is given. Mr Aslam does not endorse or recommend any broker, brokerage firm, or any investment at all, nor does he suggest that anyone will earn a profit when or if they purchase stocks, bonds or any other investments. All stocks or investment vehicles mentioned are for illustrative purposes only. Mr Aslam is not an attorney, accountant, real estate broker, stockbroker, investment advisor, or certified financial planner. Mr Aslam does not have anything for sale.)



Editor: Akhtar M. Faruqui
2004 . All Rights Reserved.