Stephen Bobko-Hillenaar, Taylor Easley and Dale Suezaki are financial advisers at Morgan Stanley, 329-7979. Retirement planning used to be relatively easy. All you had to do was work with a good company for a large part of your career and
Retirement planning used to be relatively easy. All you had to do was work with a good company for a large part of your career and then collect your pension checks in retirement. In recent years, the traditional employer-provided pension plan has undergone a transformation. Previously, most pension plan investments were directed by the employer or a trustee. Today, most employers have adopted or are in the process of adopting a 401(k) or a similar type of retirement plan. These plans give more of the retirement planning responsibility back to the employee. If you participate in such a plan, generally you must decide how your 401(k) plan assets will be diversified and invested.
Basically, a 401(k) plan allows you, the employee, to defer a percentage of your income. Many employers match your deferrals in some way, and your contributions and those of your employer are placed in a special retirement account for your benefit. You choose how you want your retirement account money invested.
Choosing your investments
Usually you will have the opportunity to make choices from among a number of investments ranging in style from conservative to aggressive. Some financial advisers believe that an overly conservative approach to retirement planning may not provide sufficient funds for retirement over the long term. That’s why many professional advisers recommend a growth or a moderate growth approach to investing when you are young, with a gradual shift to a more conservative outlook as you move closer to retirement age. Of course, your investment strategy depends not only on the number of years to retirement, but also on your individual goals and risk tolerance. Also, people are generally living longer, which means that you may need money for a substantial period of time after retirement.
As a hypothetical comparison between a growth investment approach and a conservative one, assume that you earn $50,000 a year and wish to retire in 15 years. Assuming you defer 10 percent of your income ($5,000) into a 401(k) plan each year and assuming that your employer matches 50 cents on every dollar you defer ($2,500), you will accumulate $7,500 annually in the plan. Assume you choose more conservative investments with a return of 6 percent annually; in this case your 401(k) Plan account will grow to $185,044 in 15 years. If inflation averages 4 percent a year, your 401(k) plan money will grow just slightly faster than inflation. If, however, you selected more growth-oriented investments and were able to earn an 8 percent annual return, your 401(k) plan assets would grow to $219,933 in the same period — a more than $34,000 difference between the conservative result and the growth result. Of course, this example is for illustrative purposes only and is not representative of any specific investment product. The actual results will vary depending on your specific investment choices and market conditions.
Most 401(k) plans offer a number of investment choices in a variety of risk categories. By diversifying among them, you can create a portfolio that best suits your personal situation, your financial goals and your risk tolerance. If you need more information about your 401(k) plan account, be sure to consult a financial professional.
Morgan Stanley and its financial advisers do not provide tax or legal advice, are not “fiduciaries” with respect to the services or activities described herein, and this material was not intended or written to be used for the purpose of avoiding tax penalties that may be imposed on the taxpayer. Individuals are urged to consult their tax or legal adviser. This article is published for general informational purposes and is not an offer or solicitation to sell or buy any securities or commodities. Any particular investment should be analyzed based on its terms and risks as they relate to your circumstances and objectives.
Stephen Bobko-Hillenaar, Taylor Easley and Dale Suezaki are financial advisers at Morgan Stanley, 329-7979.
