Thursday, February 19, 2009

Should you even look at your 401(k)?

It's the telltale heart of financial statements, sitting in your mail pile, tormenting you. Opening your 401(k) right now could lead to any number of emotions - none of them good. So should you bother?

Joseph Leonard, The Squeeze's 401(k) expert, understands. He is the author of the book "The Retirement Vault: A Guide to Protecting Your Assets in an Age of Uncertainty." He also is CEO of Coastal Investment Advisors, based in Southport, N.C.

We caught up with Leonard for five solid tips about your 401(k):

1. What happens to my 401(k) money if I lose my job?

When someone loses their job, many of their benefits remain intact. You can never lose your 401k just because you lost your job. Obviously, your former employer is no longer responsible for matching any contributions that you may make, but the account itself will remain intact.

In some situations, a new employer may begin matching contributions into your original 401k. More often, you will want convert your 401k to an IRA. Converting to IRA does not force you to pay any taxes or change any of your limitations. It simply gives you more freedom. Your money will no longer be in the company’s 401k fund and will no longer be managed by that particular company's selected fund manager. You instead will either choose your own broker or manage the account and its holdings yourself.

2. Can I still contribute if I was fired (Do I even want to?)

You could still contribute, however you will no longer receive a match from your former employer. Convert your 401k to an IRA and contribute up to the tax limitations. Always remember that even though the account may be going down, you want to be stockpiling as much money away as humanly possible towards retirement. Anything that you contribute to a 401k or an IRA is tax deferred and has the opportunity to grow tax deferred until you begin to pull funds out.

3. Should I just withdraw my cash and stuff it under the mattress?

In no circumstance is the best solution to simply draw out your cash and hide it away. First of all, you will be taxed at whatever rate the funds would put you at for that year. If you are not at least 59 ½ year old, then you will also incur a tax penalty on top of the taxes due.

If you are concerned about the diminishing value of the funds inside your account then there are many superior solutions to liquidating the account. You could have all of the funds inside of your account converted to cash or money markets without physically pulling the money out of the account. You could also think about rolling the account over from your current institution into some sort of either fixed or fixed indexed annuity to avoid any more losses.

Keep in mind, even if the stocks and mutual funds which you have inside your account have dropped very low, you still own those stocks and mutual funds. Your overall goal is to have those particular investments rebound over the next few years. If you are already in retirement and drawing an income off of these investments, then it may be time to seriously look at fixed rates and annuity rates available to you. In a retiree’s portfolio, guarantees can be superior to potential large returns.

4. Should I even open the monthly envelope and look at my 401(k) statements?

More and more people have been making the comment lately, “I don’t even look at my statements anymore!” In these stressful times, that's certainly an understandable position for someone to take. Many people have gradually watched their account values be cut nearly in half over the past year.

Honestly, I believe that it's a mistake not to read your monthly statement. If you're still in your working years, perhaps it would be a good idea to look at the actual funds that you have selected in your portfolio. It may be a good time to look at buying some high end, blue chip stocks which were too expensive for you a year ago and are now at record lows.

If you're retired and drawing off of your 401k or IRA, then it's more important that you review every statement you receive. You absolutely must know what you have left to work with, which in turn will dictate certain aspects of the lifestyle you choose to lead.

If you find yourself constantly stressed out over the statements that you receive, then you really need to consider rolling those accounts out of securities. You may need to look a little more towards available fixed rates. If you still want potential for growth beyond a fixed rate, you may want to consider some indexed annuities which will offer a fixed rate on the down side, but offer market returns in up years.

5. Should I take my 401(k) contribution and temporarily move it to a money market for some short-term earnings?

If you are already in retirement and are counting on your accounts to supplement your retirement, then yes, finding the highest available fixed rates or money market rates may be your best option. Many people who retired within the last two years had grown very accustomed to riding out down trends in the market. Many of these same people find that when they are no longer receiving an income, it becomes increasingly difficult to deal with the constant ups and downs in the market. To this group I would say simply, you need to figure out what portion of your money you know for a fact you cannot lose and then look for superior ways of protecting it.


Kingward said...

Move your contributions over into bond funds. At least you can derive a little income and stop the bleeding. And don't obsess too much over what has already happened.

Anonymous said...

if you are under 35, don't bother looking, you will make it all back in 10 years. unless you are retired, there is no need to follow the stock market. diversify, save, and adjust your holdings as you age. People forget that investing is a long-term process.

KS said...

This has recently worked for me, but it can be risky & its all about timing...

When the market started its downward trend over 1 year ago, I took a loan from my 401k plan. I placed this money into a money market account that was gaining more than the stock market. When the DOW went to 7k, I paid the loan off only to take another one out again when it reached 9k. Currently, the 20k that was losing money in the stock market is sitting in an interest bearing account gaining 5%. The only thing left is to get back in at the right time.....

So far, I have "protected" losses had I left it in my 401k in addition to the gains from the interest bearing accounts. The loans from the 401k do have interest @ 6% which is paid to myself from each paycheck & deposited into the 401k.

BE CAREFUL OR YOU WILL GET BURNED! Also, don't spend the money. I am 30 years old so this might not fit everyones plan.

Anonymous said...

First sentence struck me funny: in this day & age, why should the statement even be sitting in a mail pile? If the goal is not to look at it, why not just go with an e-statement?

Anonymous said...

Absolutely, look at your 401k. If at all possible, you should have the option of changing your allocations between stocks, mutual funds, and bonds. In the current state of the economy, at least 60% of your 401k should be invested in Treasury bonds.

Anonymous said...

I'd be careful about the 'rollover-to-IRA' option when you leave. You may cause a sale of the funds and thus a realized loss. Might just be better to let it sit (go from a loss to a gain) and then transfer it. Just open up an IRA and contribute to it w/o transferring.

Obviously you may not have the option of leaving it. But check into before you rollover. Since in most cases you may not be able to keep all the funds and the last thing you want to do is sell low.