Retirement Income Blog

This article is retirement help on how you can recover the $150,000 loss in your 401k in the next 6 months (for tactics to employ now, see my post at ).  This article is about understanding how and why that $150,000 evaporated and why you will not get it back in the next 6 months or likely the next 6 years.

The recent financial crisis is NOT a temporary drop in the market, your 401k and your IRA savings. It is a PERMANENT adjustment in the valuation of assets that became overvalued.  So don’t think of your 401k as down.  It’s now about the right value.  A year ago, your 401k and your house value was artificially inflated due to excessive credit.  Valuable retirement help is to tell you the truth–adjust your retirement plans downward.

Be realistic, how can an economy survive when

1. people can buy houses with 0% down and without the income to make the payments
2. stocks of companies involved in the housing balloon trade as if those houses are worth what the appraiser says

People now see that the emperor has no clothes.  The retirement help we can provide is to advise that you adjust your retirement plans downward and not think that the market will adjust itself for you.

The house that sold for $500,000 has a true value of $250,000. And all of the people involved in the housing market–the Realtors and the mortgage brokers are unemployed.  The lenders who made these ridiculous loans now realize that the loan, carried on their books at $500,000 must now be written down to $250,000, wiping out the lender’s capital.  The person who resided in the home gets foreclosed on and he might also lose his job because the housing calamity ripples through the entire economy (i.e lenders have stopped making loans to individuals or business).  People who had been taking vacations, buying cars, buying second homes and enjoying the good life by borrowing against their home equity can no longer do so as they have no equity.

So the value of real estate and assets in generally, reflected in stock prices, has now returned to a sustainable valuation and not some value created by a mass fantasy.  We all engaged in a fantasy that life could be so good without paying for it.  Reality does not work that way.  Now that you’ve swallowed the truth, let’s get to some retirement help.

Most Americans need to adjust their standard of living downward.  If you planned to retire at age 62, that will now be 66.  That’s four years less of doing as you please and instead, reporting to work.  The 3,000 square foot house you had planned as your retirement residence, better make that an 1800 square foot condo.  Your plans to remain in high cost Southern California, better think about a comfortable community in low cost Texas.  Unfortunately, all of the visions of retirement that you thought could be must now be scaled down to reality.  The best retirement help and advice we can offer is to make your adjusted and realistic retirement plans now. The good news is that you won’t go bankrupt and you won;t miss any meals.  But the fairy-tale visions we all held about a comfy retirement must now be exchanged for the truth.

Its not so bad, it’s just reality.

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It’s a little crazy but investors with IRA savings want to know “what do I do now that my IRA account has dropped by 40%?” Would the best time to have asked that question have been before you invested the money?  To ask what to do now is like asking how to catch the train after it left the station.  So rather than succumb to the illogic of how to deal with a contingency when you had no contingency plan, let’s look at the rational way to handle your retirement savings from here on.

1. You can get all of your IRA savings out of the market and into a 2% money market fund.  This will insure that it takes a very long time to recover what you lost because at 2%, it takes 25 years to recover your loss.  Of course, the money market fund also insures that you won’t lose any more.  So you must ask yourself this question: does the market have a higher probability of going to zero or to 15,000?  Does Citicorp at $5 per share have a greater chance of going to zero or to $20?  If you think that there is a greater opportunity to the upside, then the money market alternative would be foolish.

2. You can sit tight and do nothing.  This means you have the same type of risk as when you started–the risk of loss or gain.  If you were willing to accept that risk before with your IRA savings, then why not now?  Additionally, consider that you have taken the risk and experienced the negative aspect of risk–don’t you need to stay in the market to experience the positive aspect of risk?

3. You can do something very irrational like invest all the money in gold because you heard some guy on CNBC says that gold is going to $2000 an ounce.  In other words, you lost money, are unhappy that you took so much risk and now want to take more risk with your retirement savings to gain it back.  Reminds me of the guy who lost everything in a card game and only had one asset left–his house.  In an effort to gain everything back he had lost, he wagered his house.  Does that seem like a crazy idea to you? If so, then you don’t try to gain your money back with an “all or nothing” bet.

4. What’s gone is gone.  You cannot think about “getting even.”  You have what you have and the best way to think of the right action is to ask yourself this, “I have $xxxx of retirement savings.  Based on what I know about myself and my emotional stability, my view of the future and my future needs, what is the best course of action NOW (with no reference to the past)?”

Hopefully, with these distinctions laid out here you can consider them calmly and the appropriate course of action will be obvious with your retirement savings.  And by the way–remember that your retirement savings are no different than the rest of your money (other than they grow tax deferred).  So if your non-IRA savings have been sitting in a money market during the market fall, look at everything you have and maybe you’re only down 10% overall and shouldn’t feel so bad.

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Many of you are somewhat familiar with the traditional Individual Retirement Account (IRA). It’s a type of retirement account that you can open yourself; it’s not run by your employer. For many people , it’s the bedrock of their retirement plan. Whatever you contribute to it grows tax deferred until you withdraw money. Your IRA savings are taxed as ordinary income in the year you withdraw it.

For 2008, you can deduct your yearly contribution of up to $5000 if you’re not covered by a retirement plan at work. If you are covered, then you can deduct this full amount if you file single (or head of household) with a modified adjusted income of $53,000 or less or file married filing jointly with income of $85,000 or less. For every $1,000 you’re over these income limits, your maximum deductible IRA savings contribution is reduced by $500 for single and $250 for married taxpayers . Nondeductible contributions to your IRA savings aren’t taxed when you take them out - only their earnings.

Tax-deferred compounding of your IRA svaings is the key aspect of an IRA. Deductible contributions help you to get more money in. If you’re taxed at the same or lower rate when you retire then that’s another plus. That’s pretty much the basics. But what else might be important to know for decisions you make as you approach or begin your retirement?

What can we do to increase our IRA savings? For those of you 50 or over, be sure to contribute the extra ’the catch up’ amounts of $1,000 -beyond the standard $5,000. And you can do this for your spouse too. A spousal IRA is an IRA to which a couple contributes on behalf of a nonworking spouse, even when that person earns little or no income. If your spouse is 50 or over too, she can contribute the full $6000.

You can contribute IRA savings to a traditional IRA until year before you turn 70½. This gives you a lot of time to take advantage of catch-up contributions to increase your retirement savings. When you reach 59½, you’re no longer subject to a 10% penalty on withdrawals. But remember, you must begin withdrawing your IRA savings at least the minimum required distribution the year after you turn 70½.

What about bankruptcy? The new bankruptcy law says that retirement accounts are protected from creditors in a bankruptcy. It’s best to consult a lawyer about your IRA savings if you do file bankruptcy and get professional retirement help.   In many states, IRA savings are protected from creditors without a bankruptcy filing.

What else can you use you IRA savings to invest in beyond the usual investments? Although not well-known, you can buy unencumbered real estate (i.e. condos, apartment buildings, single family homes, etc) directly with your IRA. Of course, you can also use your IRA to buy real estate indirectly through a corporation or a real estate investment trust (REIT). But, you can’t use your IRA savings to buy your home or vacation property that you live in, or property that you use in your business. 

Get your copy in order to Maximize your IRA Savings

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