Retirement savings – diversify!

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We support reforms to the financial marketplace that protect consumers from unscrupulous banks and lenders.

By Consumers Union on Monday, April 7th, 2008

If your company stock takes a nose dive like Bear Stearns – from $170 to $10 a share in a year – would your retirement plans evaporate as quickly? They just might if your 401(k) is heavily invested in company stock.

In the Enron meltdown in 2001, employees lost their jobs and a significant portion of their retirement funds. Now, Bear Sterns employees face not only the loss of their jobs, but big chunks of the part of their retirement savings which were invested in their employer’s stock. It’s hard to feel sorry for highly paid employees who appear to have helped to create the subprime mortgage mess, but when a company’s value plummets, employees at all levels can be hurt if their retirement savings are linked to the company’s value. If a chunk of your 401(k) or other retirement funds is in your employer’s stock, this latest Wall Street wakeup call is a good time to diversify.

Put simply, diversifying reduces your risk by dispersing your investments between types of investments that do well or poorly at different times – stocks, bonds and investments in different sectors of the economy.

If your company makes its 401(k) contribution to your retirement fund partly in company stock, be sure you know when you’ll be allowed to sell that stock, and watch the calendar to make sure you do so. Also, if you leave a company with a 401(k) plan that has lots of company stock, you might be able to roll your 401(k) over into an IRA and then sell the company stock and replace it with a more diversified set of investments.

Consumer Reports discusses diversification, as well as the debate of a Roth IRA vs. a traditional IRA, to help you sort out these retirement issues.

We all want to trust our employers. But remember that you are at more risk if both your job and your retirement depend on the well-being of your employer. When it comes to retirement, remember Mom’s advice – don’t put all your eggs in one basket.

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