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March 22, 2008, 11:10 p.m. EDT

Retirement Funds: Invest More Now

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By Jonathan Burton

Falling stocks are roadblocks to a comfortable retirement. At times like this, when the path looks especially rocky, it's tempting to reduce your regular contributions to a 401(k) account or other automatic investment plan.

In fact, with U.S. and international stocks both down sharply this year, it's actually a prime time to boost your commitment to these all-terrain retirement vehicles. Take a bit extra from each paycheck, buy more shares at lower prices, and let the market's long-term upward trend do the rest.

"It's a practice that almost all the great investors have used," says Christine Benz, director of personal finance at investment researcher Morningstar. "They've taken advantage of short-term market panics. It's a sensible strategy for smaller investors to emulate."

Of course, anyone just a few years from retirement shouldn't pile on stock-market risk -- there isn't enough time to recover from losses. But this recent turmoil has also rattled the bond market, where the same "buy low" strategy applies.

"If you can afford to contribute more, I would tell you to increase it in any market," says Sri Reddy, head of retirement strategies at ING. "Participate as much as the plan will allow."

Stick to the Plan

Increasing payroll contributions to a retirement plan, regardless of market conditions, will likely earn you more over time.

Consider two hypothetical 401(k) investors who stashed $1,000 in a Standard & Poor's 500 index mutual fund at the end of 1997. Initially, they each added $100 a month -- $50 from salary and a $50 employer match -- to this all-stock portfolio. A decade later, that approach brought the account's value to about $17,500, according to investment researcher Lipper.

During this period, the U.S. market went through an uplifting bull market and a punishing bear. Indeed, it was still a dark time for stocks at the end of 2002, when one of these workers -- by now earning a bigger paycheck -- upped her monthly contributions to $75 with an equivalent employer match.

That decision proved lucrative: At the end of 2007, this worker amassed a retirement portfolio worth $21,000.

Even better, the automatic nature of these plans takes the emotion out of investing -- as long as you don't tinker with it. Through what's known as dollar-cost averaging, you're buying more shares in down markets and fewer in up markets. The important thing is that you're in the game; once you slip out of retirement-savings mode, it's hard to get back in.

"The worst thing that can happen," says David Kudla, chief investment strategist at money manager Mainstay Capital Management, "is that someone who has a long-term strategy designed to meet their goals and time horizon lets short-term market volatility cause them to waver."

Stay Balanced

Yet with rising prices at the supermarket and the gas pump, an uncertain outlook for jobs, and the pressure of mortgage payments on homes that have lost value, many Americans are stretched thin. A 401(k) may be a lifetime plan, but to many people at this moment it's a piggy bank to cover the bills.

Focus on the big picture. Trimming retirement contributions puts more money in your pocket, but you'll have less once you stop working, and you may even have to work longer to make up the difference. Look for ways to cut spending or consult with a credit counselor before you slash savings.

"Turning to 401(k) money is not a reliable long-term solution to your debt problem," says Gerri Detweiler, a credit expert with Credit.com. "It's better to leave it alone and look at your other options."

"By decreasing contributions now, you're giving up a long-term retirement nest egg," adds Dean Kohmann, a vice president of 401(k) plan services at Charles Schwab. "Whether the market goes up in one year or three years, you're still better off staying invested."

Target-Date Funds

That's difficult advice for a lot of folks to swallow, even if they have money to spare. Many investors are scared to stay in stocks when prices are tumbling, let alone buy more. One way to keep your footing is by investing in target-date retirement funds, a staple of many 401(k) plans.

These broadly diversified mutual funds follow a preset "glide path" that trims exposure to stocks as your retirement date approaches. For example, Vanguard Target Retirement 2015 Fund /zigman2/quotes/200793742/realtime VTXVX +0.68% (VTXVX), geared for people close to retirement, recently kept a mix of 65% stocks and 35% bonds. In contrast, Vanguard Target Retirement 2025 Fund /zigman2/quotes/207528466/realtime VTTVX +1.17% (VTTVX), designed for people in their late 40s with longer time horizons, has about 80% in stocks.

Vanguard's target-retirement funds, which have varying dates currently going up to 2050, are highly rated by Morningstar, which also praises T. Rowe Price Retirement 2015 Fund /zigman2/quotes/200892525/realtime TRRGX +1.06% (TRRGX) and others in that fund family's lineup. Other leading fund companies such as Fidelity Investments and American Funds also offer their own retirement funds.

"Many of these funds are constructed with a solid underpinning of asset allocation," Morningstar's Ms. Benz says. "If you ratchet up your allocation in your 401(k) plan and your money is going to at least a few well-diversified funds, you're spreading the risk that one lousy pick will sink the ship."

/zigman2/quotes/200793742/realtime
US : U.S.: Nasdaq
$ 13.42
+0.09 +0.68%
Volume: 0.00
May 27, 2022
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/zigman2/quotes/207528466/realtime
US : U.S.: Nasdaq
$ 18.22
+0.21 +1.17%
Volume: 0.00
May 27, 2022
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/zigman2/quotes/200892525/realtime
US : U.S.: Nasdaq
$ 13.32
+0.14 +1.06%
Volume: 0.00
May 27, 2022
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