Financial Tips for Gays and Lesbians: Recession-Proof 401(k) Investing

by Mary Stockton, LUTCF

With concerns about our economy on everybody’s lips, many gays and lesbians may feel tempted to make immediate and drastic adjustments to their 401(k) or 403(b) accounts. Such knee-jerk reactions are understandable—few things can invoke panic like the thought of losing everything you and your partner have worked to build.

Be Patient—These are Long-term Growth Vehicles

Gays and lesbians need to resist the urge to sacrifice stability for a quicker fix. The truth is, defined contribution retirement savings plans are designed for long-term, tax-deferred accumulation. Although many companies provide a “company match” percentage of what you contribute, you and your partner should both be aware that you won’t be building your nest egg overnight.

When growth is this gradual, down years can be nerve wracking—but resist the urge to make too many changes. According to market historians, the stock market has registered twice as many positive return years as negative, and in the 57 positive years since 1926, 47 have yielded double-digit returns for investors. In addition, defined benefit contribution plans have built in features—such as asset allocation and diversification capabilities—that can help ride out market waves and maximize many savings opportunities.

Dollar Cost Averaging May Help Reduce Overall Risk

Since automatic pre-tax withdrawals are paid into your 401(k) accounts on a regular basis—usually with each paycheck—gays and lesbians who take advantage of this benefit are already enjoying dollar cost averaging. Dollar cost averaging is a systematic, disciplined approach, whereby you invest the same amount of money at regular intervals, rather than trying to time the market. When the market is down—along with stock prices—your money will buy more shares. When the market is up, you buy less. The bottom line: with dollar cost averaging, you are never “out of the action.” And over time, the purchase of shares at regular intervals can help smooth out the impact of short-term market fluctuations.

Keep in mind, however, that dollar cost averaging does not assure a profit, nor does it protect against loss in a declining market. For the best results, GLBT singles and couples must continue to invest regularly in their retirement accounts, regardless of fluctuating price levels. Investors should also consider their financial ability to make purchases through periods of low price levels.

Know Your Risk Tolerance

Knowing your financial risk tolerance is crucial when assessing how to manage your money. Regardless of how the market performs, some gays and lesbians are more comfortable with risk than others, so be sure to discuss the matter with your partner if you are in a committed relationship.

Regardless, it is prudent to review your and your partner’s portfolios once or twice a year. Making changes to your accounts in response to a specific market turn is not necessarily advisable, but a balanced 401(k) requires a balanced, informed perspective.

Asset Allocation is Key

For the most balanced 401(k), LGBT couples and singles should be sure to include a mix of stock and bond funds. And within stock funds, you and your partner will want to combine growth, value and large cap funds with some mid cap and smaller funds. This way, you spread risk amongst a variety of investment categories, which can help to safeguard against being hit too hard if one fund doesn’t perform as hoped.

The “Age Percentage Equivalent” — A Strategy that can Grow with You

All of this still begs the question: How much should gays and lesbians invest in conservative versus risky funds? In general, it’s best to invest the percentage equivalent of your current age into more conservative vehicles. In other words, a 25-year-old with the time to ride out market fluctuations can consider investing 75 percent in riskier funds, thus reserving 25 percent (the equivalent percentage of his/her age) for more conservative choices. As that person nears age 50 s/he could equally split the risk between more growth-oriented funds and bond-type funds.

By the time that person is 65, it may be a good idea to have 65 percent of assets in safer vehicles, while still leaving 35 percent to achieve potentially higher returns in riskier vehicles. By following a strategy similar to this, you and your partner can enjoy the benefits of diversification while adjusting your portfolios to suit your age, goals and current situation. It’s also a way to help ensure that your assets aren’t all invested in a down market just as you’re preparing to retire.

It’s Your Future

Defined benefit plans are a wonderful way for gays and lesbians to save for retirement and benefit from stock market potential simultaneously. But as with any investment, you and your partner need to take the time to make the right choices. By understanding your risk tolerance, taking advantage of dollar cost averaging, making careful diversification choices and adjusting those choices as needed, you can help ensure that the funds you’ve worked so hard for will be working just as hard to give you a comfortable retirement.

For more information on 401(k) choices and diversification, please contact Mary L. Stockton, Registered Representative, NYLIFE Securities LLC, 8910 University Center Lane, Suite 300, San Diego, CA 92122, (858) 623-8600.

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