Protecting Your 401(k) from a Decline in the Equity Markets

I read an article recently about a movement being led by retirement experts from The Brookings Institution in Washington that would allow 401(k) participants to direct a portion of their retirement plan contributions into a guaranteed-income offering in 401(k) plans - the idea being that 401(k) participants could protect a portion of their retirement savings from a decline in the equity markets.

While this new initiative is apparently aimed at persuading lawmakers and employers that guaranteed-income vehicles are a critical component of America’s 401(k) plans, the concept of protecting a portion of your retirement savings from a decline in the equity markets is not new. I have been using this strategy for many years in my practice. In fact, I write all about it in my book. Chapter 7 describes in detail the concept of placing a portion of your investment portfolio in a tax-deferred savings vehicle that will 1) protect your retirement income from a market downturn during retirement, and 2) provide a stream of income guaranteed to last for the rest of your life.

Understand that although proposals are being developed to increase the interest and the usage of guaranteed-offerings in 401(k) plans, many 401(k) participants can implement strategies to protect a portion of their retirement savings via guaranteed tax-deferred savings vehicles right now. In other words, you do not have to wait for the availability of such a program as an option within your particular company plan.

In Chapter 7 of my book, I describe the process of converting a portion of your portfolio into alternative tax-favored savings vehicles to protect a large portion of your assets from market declines increasing the lifespan of your investment portfolio.

I’ve also written about another opportunity that many people may have to move a portion of their money and protect it from a market downturn. An in service, non hardship withdrawal may provide early access to your retirement account if it is permitted by your retirement plan. If permitted, you may be able to request an early retirement account distribution which can then be transferred directly to a rollover IRA where a portion of your retirement assets can be placed in a guaranteed tax-deferred savings vehicle designed to protect your retirement income from a market downturn during retirement. It is important to understand that with this option any money you take out in the form of a distribution is subject to ordinary income tax and a 10% penalty tax if you are under the age of 59 1/2.

Hope is Not a Plan

The shift away from defined benefit pension plans to defined contribution plans is a trend that has revolutionized retirement planning by placing more of the responsibility for saving on the individual. Unfortunately, this responsibility comes with a price. Many individual investors have lost money in mutual funds, 401(k) plans or in the stock market over the last year and a half and those closer to retirement may never recover their losses. In fact, the bear market has left many investors afraid to even look at their investment account statements.

How has the bear market changed your plans for retirement?

How long do you think it will take for you to recover from the recent market decline or bear market (Hint: See Chapter 7)?

Do you have a plan to help you rebuild your investment portfolio?

Now is the time to review Chapter 6 in my book about the process of building financial security. In this chapter and throughout my book, I have provided the tools, developed from leading research in the financial planning industry, to help calm your fears and to help you to achieve your goal of financial independence.

Use this process of building financial security to realize your potential with a sound plan and the best strategies for managing, protecting and preserving your wealth.

More Money for Retirement Right Now

In order to fully enjoy a quality retirement, you may find that you are in search of ways to supplement your income from Social Security, a pension plan or investments. These three sources of income have often been referred to as the three-legged stool. As you may know, fewer and fewer retirees can count on income from defined benefit pension plans. The burden has shifted from the employer to the employee who now has to provide for his or her own financial future through a company sponsored defined contribution plan.

So, what if your retirement accumulations in your 401(k) or other retirement plan, your IRA and other investments are not enough to provide for the kind of retirement you are dreaming of? What can you do? You may wonder if you still have a chance to live out the life of your dreams.

My new book, More Money for Retirement Right Now: Unlock the Equity in Your Assets, Create Immediate Income and Live a Richer Life is for those who want to take control of their financial situation- to maximize their financial resources – to provide for their own financial security and independence. It is full of creative, wealth building ideas and unique financial strategies and options to supplement your income from Social Security, a pension plan or your investments. These little known strategies and techniques add a new dimension to retirement planning and another leg to the stool by incorporating new sources of income.

Why limit yourself to the traditional sources of income you may receive from Social Security, a pension plan or your investments. By unlocking the equity you have in your “hidden assets,” you can free-up cash to build more wealth and create new “income steams” from assets you previously ignored.

Whether you’re retired, nearing retirement or many years away, this book shows how you can enhance your income using your existing assets and investment portfolio and provides the information you need to make more money for retirement right now. It provides a thorough, yet totally practical evaluation regarding the uses and implementation of these strategies to maximize your financial resources.

I think you’ll be surprised to find out how much more money you could have for your retirement and how much more you can enjoy the quality retirement you envision.

More Money for Retirement Right Now (Griffith, 2008, ISBN 0-9785506-4-1) is available through your local bookstore or online from leading booksellers.

Investing for Retirement in a Volatile Market

This is a tremendous time to be investing for retirement. Turbulent markets can be one of the best times to build assets for the future. There are huge opportunities for those who are focusing on building additional wealth for retirement. Even recessions provide an opportunity because ultimately periods of economic contraction lead to the next cycle of economic expansion.

Understanding this can make investing in a volatile market somewhat easier. In the current market, in which there is a steady stream of weak economic news, there is considerable market volatility. This creates considerable anxiety among many investors but even as news about the economy and the markets is pessimistic, historical records of market recoveries justify optimism – that patient investors who maintain their course will benefit in the long run.

Grow Your Wealth the Professional Way

Simply put, history shows that in the face of tough times, the key is to develop a plan, maintain your course and avoid emotional decision-making. We have all learned over the years that a written plan with solid goals and objectives is the best way to achieve anything. If you are a younger investor, you may have many years to go before you retire. Your working years represent your accumulation years. In Chapter 4 of Securing a Retirement Income for Life, you read about building a successful investment strategy. All of the material in this chapter includes the most recent research and cutting edge ideas used by the top investment professionals. Now is the time to maintain a diversified portfolio as described in that chapter. Review Chapter 6 for help with creating an allocation strategy for your retirement assets. If you become overly concerned about market volatility, you should reassess the level of risk in your portfolio. Market volatility is nothing new. Patient investors with a long-term investment horizon and a diversified portfolio will eventually be rewarded. In times like this, it is important that you maintain your course and avoid emotional reactions.

Of course, as the markets shift and your needs and goals evolve, a reassessment and fine-tuning of your portfolio may be appropriate. With an understanding of your own retirement needs and – most importantly – a plan with solid goals and objectives, you will benefit in the long run from a market recovery and from significantly higher average annual gains.

Achieve Financial Independence

The bottom line is this. If you are still investing for retirement, I strongly encourage you to take advantage of this great opportunity. You cannot afford to miss this incredible opportunity to build more wealth for retirement. If you follow the important topics discussed in my book, you will know how to achieve your goal of financial independence.

Making a Large Life Insurance Purchase Without the Proper Advice

One of the most common mistakes made by individuals who purchase large life insurance policies is making large life insurance purchase decisions without coordinating their life insurance needs with other aspects of their financial situation, such as investments, retirement planning and tax issues. I see this most often in my wealth management practice with higher income, higher net-worth individuals, such as physicians.

Certain types of policies are more appropriate for different circumstances. For example, you could end up buying a certain life insurance policy directly from an insurance agent. Your average life insurance agent may not have the prerequisite training and expertise to analyze and evaluate your investment portfolio, estate plan, cash flow and retirement plan prior to making any recommendations to buy life insurance.

Without the prerequisite training and without spending sufficient time getting to know you, it is not possible to recommend a personalized strategy designed to protect and preserve your assets, minimize taxes and increase your wealth.

The fact of the matter is that financial planning for most physicians and other high net-worth individuals is far too complex for most insurance agents. It involves a number of complex, interrelated areas such as asset allocation, investment planning, retirement planning, insurance needs analysis, tax planning, as well as charitable giving, retirement, special needs and legacy planning and estate planning. What’s more, each area of financial planning is constantly evolving. Those who do piecemeal planning by engaging several different advisors who do not work together are simply fooling themselves and jeopardizing their families' financial future.

Not surprisingly, by making large life insurance purchase decisions without professional guidance and without considering the many complex aspects of financial, tax, insurance and estate planning, many people make critical mistakes that could cost themselves and/or their beneficiaries a small fortune. An independent life insurance agent may not know which policy may be more efficient for you and/or whether the cash value in an existing life policy could be put to better use achieving your other financial goals. In addition, he or she is often unaware of various wealth-building strategies that could increase the magnitude of your wealth.

Make sure you coordinate your life insurance needs with other aspects of your financial situation, such as investments, retirement planning and tax issues prior to making any large life insurance purchase decision. The interesting case scenarios in Chapter 2 of Securing a Retirement Income for Life highlight the need to understand the issues inherent in protecting and preserving your wealth. In Chapter 9, I address how tax planning, trusts for heirs such as children and grandchildren, charitable giving, selection of executors and trustees, asset titling and how the execution of certain estate documents and trusts would prepare your heirs for income and estate tax consequences, if any.

The manner in which you purchase life insurance is particularly important. Done correctly, it can help to ensure your long-term financial security and independence and create from many thousands to millions of dollars in multigenerational wealth. If done incorrectly, it can have extremely adverse financial consequences for you and your family and ruin your plans for retirement and the distribution of your wealth.

What to Do About a Market Meltdown: Part Two

Opportunities Abound

Amid the current economic climate, opportunities abound for investors to bolster their retirement portfolio. Virtually every day, the business news is all about the market’s recent volatility and the likelihood of a recession. As usual, all of this negative news is causing some people to make bad investment decisions based purely on emotion. When stock prices are declining, many people make emotional decisions based on fear and begin to liquidate their investments. As you know from reading my book, this is the exact opposite of what many people should do during a recession or market decline. While you should always construct your portfolio based on a rational investment process as described in Chapter 4, a recessionary environment could present an opportunity to increase contributions to your 401(k) plan and to your taxable investments as well.

If you are investing for retirement, the following steps will help you keep market declines in perspective and potentially help to accelerate the growth of your portfolio when the market recovers:

Reassess Your Goals and Your Risk Tolerance

A recession or market decline provides an opportunity to reevaluate your current investment strategy in relation to your objectives and personal risk tolerance. There is no one particular investment portfolio that is appropriate for all individual investors. The optimal portfolio will depend on the amount and timing of your cash flow needs, tax considerations and market conditions. If you feel there has been a change in your personal objectives or a change in your ability to tolerate risk due to what is going on in the economy, you should reassess the level of risk in your portfolio and reallocate your investments as needed.

Evaluate Your Diversification

You’ll want to make sure your portfolio is well diversified based on your time horizon and risk profile adjusting your holdings as asset values change in order to maintain the desired allocation between stocks, bonds and cash. Depending on your time horizon, a market decline may provide an opportunity for you to increase your holdings. If you are currently investing for retirement by making regular contributions to your 401(k) plan, a market decline may present an opportunity for you to purchase more shares of the underlying assets at lower prices.

Remain Focused on Your Long-Term Plan

When investing for the long-term, you should not overreact to a short-term market decline. Instead, you should remain disciplined and look at your investment portfolio in the context of your overall financial plan. When the economic climate looks gloomy, many people will succumb to what they hear and read in the media by liquidating their investments. This opens up opportunities for knowledgeable investors. Rather than avoid the market, smart investors - with the patience and commitment to remain invested through the volatile weeks or months - will be rewarded when the market recovers.

By remaining disciplined amid market turbulence, you may benefit from significantly higher average annual total returns when the market recovers. Investors who remain invested avoid the potential penalty of missing the best days when the market advances the most. Although we can never be sure when the economy and the market will recover after a short-term decline or recession, sometimes a recovery can be dramatic. Do you know what the average gains were in each of the two previous recessions 12 months following the market bottom?

What to Do About a Market Meltdown: Part One

Protecting Your Retirement Savings

For many people, the short term pain of watching the value of their retirement savings drop during a recession or bear market can give them a reason to question the validity of investing in the capital markets. No one seems to mind when things are going well, which is typically during an economic expansion or lengthy bull market. Maybe you’ve had the opportunity to experience one yourself and how a period of exceptionally high annual returns can accelerate the growth of your investment portfolio. On the other hand, a down market, characterized by a bear market or recession, provides a reality check and an opportunity to revisit your long-term goals. For some people, however, a decline in the market can seriously affect their ability to maintain their chosen lifestyle.

For example, a declining stock market resulting in short term losses during the first few years of a distribution (retirement) portfolio can destroy a retirement plan. A distribution portfolio is a portfolio where there are periodic withdrawals and no cash flows in. When there are no cash flows into a portfolio, short-term losses can cut the portfolio lifespan dramatically. In many cases, short-term losses can cut the portfolio lifespan in half, which means you would need significantly higher gains (returns) in the future to recover from those losses.

The fact of the matter is, it is not so much about historical averages or what the market will or will not do. Market conditions and the economic environment change over time and stock market volatility is an inevitable part of investing. In the distribution phase, it is more about designing a portfolio that will account for the sequence of returns and fluctuations in the value of your portfolio.

If you have prepared an investment plan that will account for fluctuations in the value of your portfolio as described in Chapter 7 of my book, then you should not be unduly concerned. Nor should you overreact by abandoning your long-term plan. Overreacting to a market meltdown or recession by changing the composition of your portfolio could seriously hamper your ability to achieve your goals.

For those who have experienced a lengthy bear market or recession in previous years, let me ask you a question. What happened afterwards? If you remember the last bear market or recession, then you should know that our economy has always recovered. What did you do during the last market decline? Did you abandon your long-term investment plan?