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Pre-Retirement 401k & Asset Allocation Advice

Question:I plan on retiring in 15 years (at age 60) and currently have 85% of my money in stocks. I’ve been maxing out my 401(K) since I was 21, and in the last year, I have seen some frightening drops in my funds. Should I be making any kind of changes to prevent more losses?
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Larry, Texas



Answer: Larry, you’re the poster child for retirement. Congratulations for maxing out your 401k since your first started work. Starting early, maxing out your contribution, and having many decades for your money to grow tax deferred are keys to your ultimate retirement success.

Let me answer your question by putting this economic crisis in perspective with your goals. Although many American’s panicked and have sold their stocks to cash, I’m glad you haven’t. You will retire in 15 years but could live another 25-35 years beyond that so your actual time horizon for needing these funds is potentially over a 15-50 year time frame. Consequently, with decades of life ahead of you, I do not feel you need to bail on your current investment strategy.

To make you sleep better at night, assuming recent declines are bothering you, you may wish to consider starting to allocate a higher percentage of your current 401k contribution to bonds/fixed income investments; so by age 60 for example, you have an allocation that is more defensive such as half stocks, half bonds.

Another alternative to consider would be to continue investing 85% of your money to stocks. If you go this route, you should set a benchmark on your 401k so that every time your equities increase by 5-10%, you sell the profits and rebalance to bonds/fixed income. Again, the goal would be to get you to a more defensive allocation by the time age 60 rolls around.

Bill’s Bottom-line: Start saving money early. If you can, max out your 401k. Diversify your account and rebalance it at least annually.

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Bill Losey, CFP®, CSA, America's Retirement Strategist®, is the resident retirement planning expert for CNBC's "On the Money". He coaches women and couples nationwide with their retirement planning and investment portfolios. Bill is the author of Retire in a Weekend! The Baby Boomer’s Guide to Making Work Optional and he also publishes Retirement Intelligence, a free weekly award-winning newsletter. He can be reached online at www.MyRetirementSuccess.com.