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A retirement blueprint for 2002
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January 15, 2002: 11:51 a.m. ET
Here's a three-step plan to get back on track.
By Staff Writer Martine Costello
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NEW YORK (CNN/Money) - We've had two punishing years for 401(k) returns. The recession and the bear market put the squeeze on our wallets. There was the psychological toll of Sept. 11. Add to all that record layoffs.
And even if you don't work for Enron, the $1 billion losses in its employee retirement plan have to make you wonder whether it could happen at your company.
"Some people haven't looked at their retirement accounts because they're too upset," said Mari Adam, a certified financial planner from Boca Raton, Fla.
Who wouldn't be confused about which way to turn this year? You might wonder if you'll ever have enough money to stop working. But it isn't as scary -- or hopeless -- as you might think. In fact, you can get yourself headed in the right direction by taking a few simple steps.
Step one: Spread your bets
401(k)s lost money for the first time in their 20-year history in 2000, and it looks like they will lose money again in 2001. (Figures won't be available until May.) The people who suffered most were the ones who didn't invest across different asset classes and sectors.
"The last two years have really shown the importance of having a diversified portfolio," said Peter Syslack, a manager in the retirement services group at Strong Funds.
A lot of people who ignored asset allocation during the bull market were not prepared when conditions changed in 2000. Exposure in sectors like bonds and small caps would have cushioned their fall during the past two years, Syslack said.
And learn from what happened to Enron employees. If your company matches your 401(k) contributions in stock, make sure your other funds in the plan do not own it.
Your asset allocation plan will depend on your age, number of years until retirement, and risk tolerance. Strong has five recommended portfolios for people, ranging from "very conservative," with only 20 percent stocks, to "very aggressive," with 90 percent in equities. (Click here to use CNN/Money's asset allocation tool.)
Step Two: Save more
The next step is to take advantage of depressed market conditions and new rules that will allow you to save more.
The annual savings limit for 401(k)s is increasing this year to $11,000 from $10,500, and rises to $12,000 for people 50 or older. For IRAs, the limit is going up to $3,000 from $2,000, or $3,500 for people 50 and older. Ideally you will invest as much as you can to take advantage of tax-deferred growth.
People tend to invest more when the market is strong, but the best strategy is to buy when stocks are falling, so your money goes farther. Don't worry about recent market losses -- it's long-term returns that count. It's crucial to keep slow and steady contributions to 401(k)s and IRAs.
"You need to learn not to obsess about the past. Don't give up on equity investments," Adam said. "Don't think, 'Why do I bother doing this when the market just goes down?'"
The great thing about 401(k)s is you contribute pre-tax dollars, so it doesn't seem as big of a hit to your paycheck. It also lowers your taxable income, so you'll pay less to Uncle Sam. In some cases, you can also deduct your contributions to IRAs, another way to get a break from the government.
Step Three: Reassess your funds
Finally, the past two years have taught us that you shouldn't chase the hottest mutual funds. Instead, look for funds with the best track records.
Bud Kasper, a certified financial planner from Kansas City, Mo., said you should look for skilled stock pickers who will know how to sniff out the best opportunities.
"We're looking for good money managers to protect the money and promote the money," Kasper said.
Kasper recommends managers like Bill Nygren, who has delivered strong returns at Oakmark and Oakmark Select funds. He also likes Bob Olstein of Olstein Financial Alert, and John Calamos of Calamos Growth.
Oakmark fund earned 18 percent in 2001, while Oakmark Select gained 26 percent, according to fund-tracker Morningstar. Olstein Financial Alert gained 17.2 percent in the same time, and his strategy includes poring over financial statements to look for signs of trouble, Morningstar said.
Calamos Growth, though it was off 6.9 percent in 2001, beat the average return for mid-cap growth funds by 14.4 percent, Morningstar said. (Click here for CNN/Money's special report, The Ultimate Fund Guide, with the best funds to own for 2002.) 
* Disclaimer
Click here to send mail to Martine Costello
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