401(k) AND RETIREMENT PLAN ROLL-OVERS

            In never fails to amaze me when employees take a company lifetime income option from their retirement plans.  They never ask the question, “Is my monthly paycheck indexed to the consumer price index or indexed for inflation?”  They never ask about the inflation factor that relates to their future income.

            In 1988 I attended a meeting at Long Island University in Long Island, New York for a conference on pre-retirement planning for women.  One of the speakers told of his mother’s retirement income problem.  It seems that his father worked for the state of New York and if he died his mother would get two thirds of his salary for life.  In 1944 his father had died and since that time his mother had been receiving two thirds of his father’s salary. 

The speaker stated,

“My mother still receives two thirds of my father’s salary due to his death. 
She still receives her $84 dollars every month!”

            You can see the problem with taking a monthly retirement income from your 401(k) or other retirement plan when the plan does not provide an indexing provision.  No retiring American should ever take a long-term income that is not indexed to inflation.  It can mean disaster regarding your future income requirements because of the increasing cost of living and medical expenses during the elder years.

            Another issue is the fact that too many people fail to over-see their 401(k) fund management and often allow their funds to lose money in a bear market, such as the one we are experiencing.  Many employees have lost over 50 percent of their retirement nest egg since March of 2000.  If you have retirement funds that you have the control to make investment choices such as a 401(k), you must realize that you are fully responsible for making those decisions.  We suggest that you seek a second opinion to get ideas that make sound investment sense and adjust your 401(k) portfolio accordingly.  After all, your retirement funds are your financial future.

            Recovering from market losses can be tricky.  Your 401(k) plan, IRAs, variable annuities, tax sheltered annuities and other retirement plans all must be reviewed regularly.  Since March of 2000 and the terrorist attack, investment rules have changed.  We all now realize that the “buy and hold” theory is not valid.  We must “buy low and sell high” in order to grow our nest egg.  We have also learned that our “esteemed” investment analysts on Wall Street have compromised their integrity and have become sales promoters of company stocks for personal financial gain.   To make sound investment decisions in today’s economic climate - where does that leave you if you are planning to retire soon.  There are some sound retirement planning rules you will need to consider in light of our new economic climate for the 21^st century.

This chart will prove to you why we say you cannot buy and hold and the chart further shows you why you must buy low and sell high in order to reap the profits from the stock market.  If you do not have the skills to “get in the market at the right time" and "get out at out of the market before the next bear strikes", you will be better off playing it safe by using our suggestions for protecting your principal as a first priority:

Here are the historic stock market facts. 

After every bull market there are huge losses from a bear market.
(Source:  USA Today, October 10)

1966                -55%               

1967 – 1970      -147%

1973 – 1974       -113%

1977        -73%

1981        -87%

1987        -51%

1990        -50%

2000        -47%

2001            ?

2002            ?

2003            ?

The first rule is the “Will Rogers” rule.  Will Rogers was overheard to say that when he gave investment advisors money he wanted a return of his money as his first priority.  His second priority was to get a return on his money.

            This points out an important fact that all retirees should consider.  Will Rogers felt that the most important factor when investing money is to consider protection of your principal.  Too many retirees have taken too much risk in the stock market during recent years.

            To protect your retirement fund, how can you roll your funds into your own Roth IRA or IRA and protect your principal while trying to recover from some of your recent losses?  There are four basic recovery strategies to protect what you have saved and to safely grow your nest egg in the next decade.   We do not recommend that you just sit on what you previously owned and hope to recover your losses - because you may be invested in the wrong assets.  Here are four market recovery strategies that may be helpful when you retire:

• Reposition assets and savings into a guarantee of principal plan so that you avoid suffering further losses.  CEOs stated on the national news recently that they do not expect a double-digit return on stocks or mutual funds for the next decade.  The Will Rogers principle of protecting your nest egg as the first priority makes sense in today’s investment climate.

• Consider shifting a good percent of your long-term IRA and other retirement plan money into a fixed guaranteed indexed vehicle that guarantees your principal and still allows you to grow with the stock market when a bull market returns.  You can have your money in a position to grow when the market returns and still not be taking stock market risks.  We are not referring to indexed mutual funds because an indexed mutual fund places your principal fully at risk. 

• Realize that long-term bonds may be a good part of your plan until interest rates turn around.  However, you must realize that bonds will drop in yield as interest rates begin to rise again.  Long-term bonds tend to lose money (your principal) as interest rates climb.  I personally know two widows who lost over $100,000 in their principal by holding bonds from 1992 until 1999.  The fact is when you buy bonds at five percent interest and interest rates increase to seven percent interest; your bond yield will drop.  You will still get your monthly income but your money available, or yield if you sell your bonds, is dropping.  In our opinion, you may want to get out of long-term bonds when the interest rates begin to turn around.  If you don’t get out as interest rates rise, you may again be losing your principal for several years.  To determine when interest rates will again begin to rise, just watch Greenspan’s actions and you will know when to bail out of bond holdings.

• Bonus programs have potential in a market recovery strategy for some retirees.  Some companies will pay a five or ten percent bonus for your long-term savings.  The bonus is an incentive to stay with the program for a period of time and an incentive to do business with the company.

For example, let’s assume you have an IRA that has lost thousands of dollars and you are wondering if you can ever recover any of the lost money.  One choice may be to sit and hope the market returns.  However, you may be in the wrong investments due to recent economic changes and it may take years to begin a recovery program with your current investment portfolio.  Another choice would be to take a five or ten percent bonus program for some of your funds.  If you put in $50,000 into a bonus program you would recover $2,5000 in a five percent bonus program and $5,000 in a ten percent bonus program.  Both bonus programs guarantee your principal and can still grow with a bull market.

• Purchasing an annuity with a long-term care rider can also be a great market recovery strategy if you do not have long-term care protection.  One particular annuity will give you $3 for every $1 you set aside for long-term care protection.  In other words, as a supplement to your current long-term care insurance or to avoid medical bankruptcy in later years you could get three times the cash if you need long-term care or home care. 

As an example, let’s assume you do not have long-term care insurance, yet you still could face medical bankruptcy due to nursing home costs if you self-insure with your own money.  Why not set a fund aside for long-term care to relieve the worry and to protect more of your heir’s estate.

In my opinion, one good solution is to put some money aside for your care in this annuity with the rider for long-term care.  If you saved $40,000 in a bank and you have to pay for care you would only have $40,000 to pay for your care.  On the other hand, if you had the annuity with the long-term care rider you would have $40,000 saved to provide you with $120,000 for your long-term care needs. 

Which would you prefer if you needed to pay for care, to have $40,000 or $120,000 available to pay for home care or nursing home expenses?  There are no monthly premiums, cash may be available for emergencies and the heirs get the full savings with interest if you die without needing long-term care.  This is an excellent market recovery strategy for those who have lost money and do not have long-term care protection. 

Leveraging your money is effective even for wealthy retirees who may not really need long-term care insurance because it is better to set aside a fund for long-term care needs in later life. The advantage is that you get $3 for every $1 dollar immediately available for long-term care should your health fail.  After all if you have not addressed this need you will pay for your care with out-of-pocket funds anyway. It is always wise planning to have specific funds or insurance set aside for a major catastrophic illness. 

These and other market recovery strategies can help to recover some of your stock market losses and at the same time, protect your principal so that you never have to worry about big losses again.  Using the proper strategies can begin to help your recover from three plus years of losses and a bad economy that may continue for some time.