By Kim Provo

Your 401(k): Pull It Up By The Bootstraps
When the stock market feels like quicksand, and your hopes for a secure retirement seem to be sinking deeper into the mire, you may wonder if you’ll ever find your way back to solid ground. Don’t give up. You can improve your chances for a comfortable retirement by taking steps to shore up your savings.

Start with a No-brainer. There’s no way around it. If you invested in stocks during the market’s tumble, your retirement account balance is probably lower than it used to be. Unfortunately, there’s no magic bullet to replace your losses. Waiting for a market rebound may be part of the solution. But there’s another thing you can do to help get your savings back on track: Save more. Significantly increasing your contribution can help you replenish your account.

Don’t think you can afford to save more? A review of your spending patterns can help you find places to cut back. The sacrifices you may have to make now will be well worth it later on.

Cover a Lost Match. Many employers offer matching contributions to encourage employees to participate in their 401(k) plans at work. But, during tough economic times, companies may reduce or suspend their match. If your employer takes this step, it’s up to you to make up for the loss. Increase the amount you contribute to your plan to reflect the missing employer contributions. For 2009, you generally can contribute a maximum of $16,500 — $22,000 if you’re age 50 or older. (Other plan limits may apply.)

Think of Your Account as Untouchable. Even if your employer’s 401(k) plan offers loans, look at all your other options before you consider borrowing from your account. Although you’ll pay yourself back with interest, the money you withdraw won’t be there to benefit from a potential market upswing. And you’ll repay the loan with already taxed money that will be taxed again when you withdraw it from your account in retirement.

Leave It to a Pro. When the market is down, you may be tempted to take all your money out of stocks and park it in less volatile investments. But that move could lock in your losses and limit potential future gains, ultimately leaving you with less money than you need for retirement. Before you make a decision that could thwart your investment goals, talk to your financial professional. Together, you can assess your asset allocation strategy and determine an appropriate mix that has the potential to provide the growth you need while helping to cushion your portfolio from unnecessary risk.

Eroding Your Future – Inflation’s Potential Effect on Long-Term Savings

Erosion slowly wears away a piece of earth, permanently changing the landscape. In nature, the effect of erosion can be spectacular. We couldn’t enjoy the awesome beauty of the Grand Canyon if erosion from the Colorado River hadn’t helped to form it. In the financial world, however, erosion is anything but beautiful. Over time, even low inflation can erode your long-term savings, permanently changing your lifestyle. Fortunately, there are ways to prevent inflation from turning your savings into a financial Grand Canyon.

Assess Your Exposure. Inflation erodes the purchasing power of your money. Suppose you put $50,000 under your mattress for 20 years. If inflation averages 4% during that time, your money will be worth only $22,819 in terms of purchasing power at the end of the 20 years.1 When you are saving for long-term goals, such as a young child’s college education or your retirement, you may not meet your objectives unless your investments earn more than the inflation rate.

Invest for Growth. One way to stay ahead of inflation is to invest your long-term savings for potential growth. Instead of putting your money under the mattress or in a low-interest savings account that may not keep pace with inflation, consider other alternatives. For example, stocks have the potential to grow faster than the inflation rate. (Past performance is no guarantee of future results.) Invest $50,000 in a mutual fund that earns an average annual total return of 8%, and your investment may grow to $233,048 in 20 years — which will give you the same buying power as $106,360 in today’s dollars, assuming annual inflation averages 4%.1

Weigh Your Risks. Of course, stocks also have the potential for short-term volatility. They may not be an appropriate investment if you’re not comfortable with market swings or you anticipate needing your savings relatively soon. However, over the long term, a diversified mix of stocks, bonds, and money market investments can offer you the potential for earning inflation-beating returns.

1 These are hypothetical examples for illustrative purposes only. Actual inflation and investment returns will vary.
2 Mutual funds are sold by prospectus, which includes information on charges, expenses, and risks. To receive a current prospectus, please contact your registered representative. Please read the prospectus carefully before you invest or send money.

For more information or to schedule a consultation, please contact Kim Provo at  302.698.0472.
Kim Provo is a Financial Advisor at First Command Financial Services in Dover, Del. This article was written by First Command, and it is intended to promote the professional services of the company. First Command Financial Services, Inc. is the parent company of First Command Financial Planning, Inc. Investment products and services, including securities products are offered by First Command Financial Planning, Inc. (Member SIPC, FINRA). A financial plan, by itself, cannot assure that retirement or other financial goals will be met.