Investors approaching IRAs with caution

Investors approaching IRAs with caution
Chicago Tribune - ‎May 24, 2009‎


Investors approaching IRAs with caution
By Andrew Leckey
May 24, 2009
It is the year of living cautiously for investors with individual retirement accounts.The economic problems that felled investments and job security have turned many formerly eager IRA investors into tentative souls."We've seen a slight increase of a few hundred dollars per account in the IRA contributions made in 2009 compared to last year, which is the good news," said Ken Hevert, vice president of retirement savings products for Fidelity Investments. "However, we've also seen an overall decrease in the number of people actually making those IRA contributions."Although some investors see discounted investment prices as an opportunity as they sock away IRA money, many others are unsure.Investing in an IRA is discretionary, and this is a time of significant financial challenge, Hevert said. The one thing that didn't change was that many investors found motivation in the April 15 tax-filing and contribution deadlines and chose that as the time to invest, he said.Employment trends are pushing money into IRAs."Because the financial crisis has significantly increased the number of layoffs throughout industries, we're seeing a lot of people doing rollover IRAs from their company 401(k) accounts," said Petra Campos, director of retirement products for Charles Schwab. "They can leave that money with their former employer, but a great many have been choosing to roll it over to IRAs."Diversification of asset classes and investments based on how many years you have left until retirement always has made sense for IRAs, but the past year dramatized this, Campos said. As a result, investors want to put their money where they have the most flexibility on how to invest it."With so much change in the workforce, 401(k) investors leaving their companies are faced with the choice of leaving their money where it is, rolling it over to a new employer, rolling it over into an IRA or cashing it in and spending it," said Jack VanDerhei, research director for the Employee Benefit Research Institute. "That last choice, cashing it in, is the worst possible because you'll be taxed on the money as regular income and pay a 10 percent penalty on the distribution if you're not 59 1/2."Besides age, other ways to avoid the 10 percent withdrawal penalty are if you use the money as a first-time home buyer, for higher education for your immediate family, for unreimbursed medical expenses over 7.5 percent of adjusted gross income or for health insurance if you've been unemployed for a certain period. You'll still have to pay the taxes.In the case of a new employer's 401(k), check to see if it offers investment options that suit you, VanDerhei said. That shouldn't be a problem if you roll it over to an IRA at most brokerage and mutual fund companies, but compare the overall performance of several firms."There's a big disconnect about IRAs in 2009, with a lot of investors stopping their contributions because they're worried about losing more money in the stock market," said IRA expert Ed Slott, whose Web site is at irahelp.com.What many fail to realize is that they don't have to put the money in stocks but can instead choose certificates of deposits or bonds or money-market accounts, he said. There is no one IRA strategy right for all investors, because each individual's situation is different."I like to use an analogy of the IRA as a wine glass: You can put in either water or straight vodka," Slott said. "It all depends on how aggressive you really want to be."Slott, a presenter at many consumer investment seminars, has noticed some gradual erosion in the negative attitude toward stocks and mutual funds. "I hear a lot of people talk about going back into the stock market now because they figure it is down so low they can't lose much," Slott said. "But they're approaching it much like going into a cold swimming pool, dipping their toes because no one really wants to dive in."Hevert, Campos and Slott recommend Roth IRAs. These don't give a tax deduction for investment like a traditional IRA, but they do grow tax-free and don't require that you take minimum distributions at age 70 1/2, as traditional IRAs do.When converting to a Roth from a traditional IRA, you'll pay tax on the entire amount being converted. But many investment values are down significantly, which means paying less tax on gains. The potential of tax rates being higher in future years provides further reason to convert, some experts say.In 2010, investors of any income level (rather than the current $100,000 or less in modified adjusted gross income required for Roth eligibility) will be able to make the conversion to a Roth IRA and also spread the tax hit over 2011 and 2012."There's no question that if you're putting money into an IRA, you should do it in a Roth," Slott said. "Some experts argue there's an advantage to a traditional IRA because it helps with your current tax refund, but I don't know anybody who invests a tax refund."

Time's the best answer for restoring nest egg

Time's the best answer for restoring nest egg
Cherry Hill Courier Post - ‎May 8, 2009‎

Time's the best answer for restoring nest egg

"Visit courierpostonline.com/recession for all the tips on how to deal with the 'great recession.' "

By ANDREW EDER
Gannett

The 2008 stock market plunge has inspired jokes, bumper stickers and offhand quips to the following effect: My 401(k) is now a 201(k).

Behind the gallows humor is an uncomfortable truth: The bear market, as of March, wiped out an estimated $2 trillion in value from 401(k)s and individual retirement accounts.

The losses have reset retirement expectations for many older workers and exposed the dangers of a retirement-savings system that has shifted responsibility and risk onto the workers themselves.

In 1980, 60 percent of private-sector workers were covered by a defined-benefit pension plan, while 17 percent were offered a 401(k) -- then a new investment vehicle that allowed workers to stash away income tax-free, often supplemented by matching funds from the employer.

By 2006, those numbers were reversed: Now only 10 percent of workers have a defined-benefit plan, while 65 percent are offered a 401(k). The number of workers who were offered both types of plans stayed flat.

The rising share of workers with 401(k)s means that individuals need to make decisions about how to invest a big chunk of their retirement savings. Advocates say that's not always a good thing.

"People are not ready to take care of themselves, quite honestly," said Jean Setzfand, director of financial security for AARP, the 40 million-member advocacy group for Americans age 50 and older.

For those close to or already in retirement who have seen their accounts decimated, there may be no option but to work longer or rejoin the work force. But everyone who manages a retirement account can benefit by following a few pieces of advice.

Keep contributing: The temptations to cut 401(k) contributions can be myriad. Workers are weary from market losses. Financial pressures on families are mounting, making the extra income a tantalizing target. Some companies have stopped providing matching funds.

But those who cut off the flow of funds to their retirement accounts miss the opportunity to buy into the market at a discount.

"The biggest mistake is not continuing to contribute," said Carol Arnott, a certified financial planner with Greenville Financial Group. "When the market is in such a decline, it's a great place for us to be buying in with our long-term money."

Don't jump around: Another temptation is to move 401(k) money away from battered stock funds to safer investments like money market funds. Doing so locks in losses from the bear market and ruins the chance of benefiting from the rebound.

It's simply impossible to time the market, Arnott said. Another mistake she sees is investors who jump in and out of investment funds based on their performance in the previous year.

"It's like barreling down I-95 and looking in the rearview mirror," Arnott said. "You are destined to crash."

And for those who want to cash out a 401(k) when leaving a job, beware -- it will cost you 20 percent of the account's value in federal taxes, and 10 percent in early withdrawal penalties.

Watch asset allocation: It's not smart to hop from fund to fund -- but inertia can also be dangerous. Workers need to rebalance their retirement accounts as they age to adjust risk levels and find the proper mix of equity and fixed-income investments.

"When you leave people to their own devices, a large percentage of people close to retirement ended up betting way too heavily on equities," said Jack VanDerhei, research director at the Employee Benefits Research Institute.

One answer to the problem of asset allocation is target-date, or lifecycle funds, where fund managers choose an investment mix based on an individual's expected retirement date, although the management of these funds has recently come under increased scrutiny.

Reconsider expectations: Younger workers have the benefit of having many more years to return their retirement accounts to health. For those closer to retirement, big 401(k) losses may require fundamental adjustments in their plans.

One strategy is to extend the time frame in which workers plan to tap their 401(k)s. For some, that may mean postponing retirement, or even finding a job in retirement to keep some income flowing.

"Stay in the work force as long as you can," advised AARP's Setzfand. "Only time can help resolve this matter."

Survey: Calculating a comfortable retirement
Philadelphia Inquirer 

Survey: Calculating a comfortable retirement By David Pitt ASSOCIATED PRESS DES MOINES, Iowa - Rising costs and uncertainty about the economy have workers less confident in their ability to save enough money to retire comfortably, say the authors of a new study released last month. Even though workers are saving more and expecting to work longer to improve their chances of a happy retirement, there's still a disconnect. The survey shows that many are failing to plan appropriately and making incorrect assumptions about retirement income. The new survey by the nonpartisan Employee Benefit Research Institute finds that only 13 percent of U.S. workers say they're very confident they'll have enough money to retire comfortably. "Concerns about the poor economy coupled with the losses that have recently been experienced in the stock market have resulted in the lowest percentage [of a confident outlook] since the start of the survey 19 years ago," said Jack VanDerhei, one of the survey's authors and the EBRI research director. "But the good news is, I really do think this will be a wake up call for many people who had false optimism in the past." And 41 percent more workers said they're somewhat confident of having enough savings for retirement, down two percentage points from the year before. Only 20 percent of people already retired say they're very confident they'll be financially secure. That's just half of the 40 percent from the survey a year earlier. It's no surprise that most survey respondents said the economy was largely behind their pessimism. Change in behavior. With the dour mood about retirement prospects comes some behavioral changes that advisers and retirement planners say may be one of the positives coming out of the economic downturn. The survey shows that 81 percent of those who have lost confidence in having enough money to retire say they are spending less. The survey also shows 65 percent of workers say they are currently saving money for retirement. "One strategy would have been to roll up into a ball and somehow put your head in the sand and ignore this is happening," said Dan Houston, president of retirement and investor services at Principal Financial Group Inc., an underwriter of the survey. Workers have not done that, however. He said people are beginning to understand a secure retirement means saving much more than they have been. The average worker with an employer-sponsored retirement plan puts aside 7 percent, which is about half of what today's worker would need to live a comparable lifestyle in retirement, Houston said. Estimating how much money it will take to live a good retirement is one of the largest miscalculations among workers, VanDerhei said. About half the workers in the survey say their household savings and investments total less than $25,000, excluding the value of their home. A surprising 20 percent say they have less than $1,000 in savings. This signals a tremendous problem ahead. Consider that a woman earning $40,000 at retirement would need to have $203,134 in savings by age 65 to ensure she could replace 80 percent of her income in retirement, VanDerhei said. The calculation assumes she has purchased an annuity with a nominal guaranteed income and receives Social Security. A man under the same circumstances would need $190,138. Sources of retirement income. Another point of confusion for many workers is the source of their retirement income. Among workers without a defined benefit retirement plan at work, 41 percent believe they have such a pension plan. A defined benefit plan is one in which an employer pays into but the worker does not. "I'm just afraid you still have a situation where these are people who don't understand the difference between defined benefit and defined contribution plans," VanDerhei said. "They think they'll magically end up with what mom and dad had." The U.S. Bureau of Labor Statistics said in a March report that just 20 percent of private industry workers have a defined benefit plan. About 43 percent have a defined contribution plan such as a 401(k). A disturbing factor for many investment advisers and retirement planners from the EBRI survey is that only 44 percent of workers say they have tried to calculate how much money they'll need to have saved for retirement. Another 44 percent said they simply guess at how much they'll need. Fewer than a quarter say they've tried to approximate how much they'll need and fewer than a fifth say they've checked with a financial adviser. Nine percent say they read or heard about how much they should have, 7 percent have used an Internet calculator and 5 percent filled out a worksheet. The survey is based on random telephone calls to 1,257 people age 25 and older in January. It included a cell phone supplement to encompass a broader selection of people. The survey's statistical margin of error is plus or minus 3 percentage points. The was sponsored by EBRI and Washington-based market research company Mathew Greenwald & Associates Inc.

Humberto Cruz: Shape up your finances and retirement savings

Humberto Cruz: Shape up your finances and retirement savings
Sun-Sentinel.com

Humberto Cruz: Shape up your finances and retirement savings

May 4, 2009

 Exercising can be a pain when we're way out of shape (I know because I was 44 pounds overweight once). But that's exactly when we need to do it, starting slowly if we must, as part of an overall, well-thought-out plan to improve our health and fitness.

The same is true about our finances, as today's tough economic times are demanding — but not always receiving — a greater commitment to sound financial planning, even if we start with baby steps.

I thought about this after reading the 2009 Retirement Confidence Survey, the 19th in a series of annual studies about Americans' readiness and attitudes about retirement. The survey has been co-sponsored each year by the Employee Benefit Research Institute and research firm Mathew Greenwald and Associates.

This year's main findings are sobering: Just 13 percent of American workers, down from 18 percent last year and 27 percent in 2007, are "very" confident of having enough money for a comfortable retirement. That 13 percent is the lowest on record. Among retirees, confidence also fell to a new low, with only 20 percent saying they are very confident, down from 29 percent in 2008 and 41 percent in 2007.

"Our survey first picked up the drop in retirement confidence last year," said Jack VanDerhei, research director at the non-profit, non-partisan Employee Benefit Research Institute. "Given the uncertainties that exist about the economy, it is no surprise the downward trend has continued." Besides this drop in confidence, a less-noticed section of this year's study reveals an understandable but disquieting change in attitudes about financial planning.

For example, 21 percent of U.S. workers now say preparing for retirement "takes too much time and effort," up from 11 percent in 1998, when the stock market was going gangbusters. Just 48 percent say they enjoy financial planning now, compared with 62 percent in 2000, about the time the tech bubble began to burst.

Now, 63 percent believe that "anyone can have a comfortable retirement if they just plan and save," compared with 71 percent in 2002. I consider the drop significant, considering the 2000-02 period was a terrible time for the stock market.

As for good news, at least more Americans are recognizing reality. A recurring theme I found in many previous surveys, particularly during the late 1990s, was one of false confidence.

Besides cutting expenses, many workers expect to work longer, with 21 percent saying they'll be on the job until their 70s, and 72 percent planning to work for pay at least part time after retirement.

But one thing most American workers don't do — and it could help them tremendously — is at least estimate how much money they will need in retirement. In this year's survey, only 44 percent of workers said they or their spouse have tried to make the calculation, down from 47 percent last year. For help with the calculation and other savings tips, see choosetosave.org.

 

More Americans understand reality of what it takes to retire

More Americans understand reality of what it takes to retire
Chicago Tribune