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The Incredible Shrinking Nest Egg sounds like the title of a cheesy Hollywood horror movie. But it might as well be reality TV for millions of American investors in or near retirement. Many of them have watched their house values plummet along with their 401(k)s, jeopardizing backup plans to tap home equity should their retirement savings come up short.
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But younger workers, with decades to go before they retire, may look back on the Panic of 2008 as one of the best things that ever happened to their finances. By continuing to contribute to their retirement plans, they can scoop up mutual fund shares at bargain prices. And thanks to a precipitous decline in home prices, many of them may finally be able to afford a house that was previously out of reach.
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But if you are age 50 or older, your picture is not so rosy. You may have to work a few years longer than you had planned, particularly if you're not covered by a traditional pension (most baby-boomers aren't). That will give you time to stockpile or replenish your retirement savings, delay claiming Social Security benefits until they are worth more at an older age, and give your current investments a chance to recover from the biggest market rout since the Great Depression.
If you are already retired, take a hard look at your finances. A popular rule of thumb suggests that to ensure you don't outlive your savings, you should limit your withdrawals to 4% of your portfolio in the first year and increase subsequent withdrawals by 3% a year to keep pace with inflation. Christine Fahlund, a senior financial planner for T. Rowe Price in Baltimore, says although that rule works in 90% of stock-market simulations, "there is another 10% scenario to talk about -- and we've just lived through it."
Fahlund recommends that retirees concerned about running out of money reduce withdrawals from their portfolios, if possible, or at least skip the annual inflation adjustment until the market rebounds. And if you've suffered substantial losses, you may want to reset your withdrawals altogether, using your new, lower portfolio balance as the basis for your 4% distribution. The biggest threat to your savings now is withdrawing too much from a declining balance because you may not have enough left to benefit from rising stock prices when the market finally turns around.
In the meantime, you have to play the hand you've been dealt. No amount of anger or frustration is going to restore your investment losses. But moving forward with a concrete plan will help you get back on the right track, no matter your age or where you are on the road to retirement.
Younger workers benefit
Wendy and Rodney Dunn are prime examples of young investors well positioned to profit from the market meltdown. Their portfolio lost nearly 40% in 2008, about as much as Standard & Poor's 500-stock index lost. But they have decided to stick with their long-term plan. Says Wendy emphatically: "Given our age, we're staying the course."
The couple have the time to be patient. A former portfolio manager for North Carolina's state pension plan, Wendy, 33, is now a stay-at-home mom in Benson and chief financial officer of her family's finances. "We are reevaluating our asset allocation and making sure that we are still in quality funds," she says.
Rodney, 36, plans to contribute the maximum $16,500 to his 401(k) this year. Lynne Ford, head of the Retail Retirement Group at Wachovia, which merged with Wells Fargo at the end of December, says that's what workers of all ages need to do: Keep contributing as much as you can to your retirement savings. "This is the era of YOYO retirement," she says, "which stands for 'You're on your own.'"
Tax-free future
The Dunns also plan to add $5,000 each to a nondeductible IRA and then convert the two accounts to Roth IRAs in 2010, when the current $100,000 income-eligibility limit on conversions disappears. At that point, they will owe taxes only on the earnings, not the after-tax money they contributed to their traditional IRA accounts. (This strategy works best if you have only nondeductible contributions in your IRA. If your account holds a mix of deductible and nondeductible contributions, only a portion of any amount you convert to a Roth IRA will be tax-free.)
A Roth IRA is an excellent way to diversify the tax status of your future retirement income. Although you can't take a tax deduction for contributions -- as you can with a 401(k) or similar employer-based retirement fund -- all withdrawals are tax-free in retirement. And you can even withdraw your contributions (but not earnings) tax-free and penalty-free at any time. Roth IRAs are particularly attractive to anyone who believes that tax rates will be higher in the future -- a plausible scenario given the nation's record budget deficit. Single tax filers can make a full contribution of $5,000 to a Roth IRA if they earn less than $105,000, and married filers can contribute the maximum if they make less than $166,000.
Oyuki Lopez has contributed to a Roth IRA since she began working as a flight attendant nearly ten years ago. The 31-year-old recalls that once during a five-hour transcontinental flight a first-class passenger lectured her about the magic of compounding and the allure of tax-free income in retirement. She's been a crusader for saving for retirement ever since, helping her friends become more savvy about money and later bribing her husband by offering him $500 to participate in his company's 401(k) plan.
It's been a rough year for Lopez. She got divorced, quit her job and relocated to San Francisco, where she landed a position with start-up airline Virgin America. Despite the temporary setbacks, she's still keeping her eye on the future, funding her Roth IRA each month until she is eligible to participate in her new employer's 401(k) plan. She expects to contribute 15% of her salary.
POSTED BY: A. J. Simonin (February 28, 2009 05:15 PM)
Being raised in the 1940’s during WWII allows me to remember the tremendous bond drives. We had War Bond advertisements seemingly on every corner and Hollywood movie stars went on radio and in newspaper advertisements encouraging every citizen to support the war effort by buying War Bonds. As school children we saved our pennies to purchase savings stamps which could then be converted into War Bonds. The whole country was behind this great money raising effort. If ever our country has ever been at war it is now! We are fighting for our very future economic survival. We are recovering from bad decisions made in everything from sub-prime home loans to unfortunate banking and Wall Street investments. This week I watched as Secretary of State Hilary Clinton encouraged the Chinese Government to continue buying our treasury bonds. She is selling “out” the United States of America on the world market to the highest bidder. As an old man I am deeply troubled by her actions.
We need Americans to invest in America. We should not be owned by foreign governments and powers, either though the imbalance of trade or purchase of our debt! Our government should consider issuing a new bond – The United States Stimulus Bond. A bond that’s face value is guaranteed by the United States Government. Bonds only available to citizens of the United States of America as an investment in our country! A bond whose return on investment is comparable to AAA rated corporate bonds, with pre-tax yields in the 5 to 8 percent range linked to the length of term. Bonds that range in value from $25 to $100,000 so every American can buy them and even ladder them for continuous income. Bonds which pay their interest quarterly, so the returns can be used to immediately motivate the economy by purchasing homes, manufactured goods and services right here in the United States of America.
As a senior citizen I feel totally abandon by Federal Reserve Chairman Ben Bernanke and most other politicians in our government. His interest rate cuts have emasculated many of the retired seniors in this country without providing an alternative investment choice. While the interest rates are abdominal, many citizens have also pulled their monies out of the stock market, driving it continuingly downward. Previously there was sufficient return on our investments to invest in our economy such as the purchase of new cars and appliances. We frequently visited the theater and had dinner out on those occasions. Lack of consumer confidence has eliminated those and other spending actions.
Maybe if our government issued a United States Stimulus Bond the private citizens could not only help buy back our country but also stimulate our economy!
A concerned retiree,
A. J. Simonin
POSTED BY: Frank Olms of Englew (March 10, 2009 05:55 PM)
In response to Mr. Simonin(Feb 28, 2009): Congratulations. I suggested the same theory for the car industry for GM and Chrysler. Don't give them a "bailout", but sell bonds in the companies and not let the people at large foot the bill but let people who want to "invest" in the companies do so.
As for the "Government", the same thing. YOU ARE RIGHT! !! I bought those stamps and I bought those bonds and some of my relatives bought with lives. YOUR RIGHT! !! Let us take back our country and let us pay our own way, The American Way! I am forwarding your thoughts to all that I know. Hopefully it will get it where does the most good.
Thanks...
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