Getting Back on Track – A Retirement Account Recovery Action Plan

 

Just one year ago the American economy took a turn for the worse, and ever since many individuals have been experiencing financial difficulties, especially in the realm of retirement saving.

This is one of the largest market breakdowns since the Great Depression, and retirement accounts have taken a tremendous tumble, but now is not the time to sit idle and watch your retirement account dwindle. It is time for individuals to wake-up and take action to get their retirement accounts back in line.

“Fear” seems to be the number one cause of inaction among American retirement savers. With a lingering unstable economy, retirement savers just don’t know what to do. They’re worried about a laundry list of things and they need help understanding how to move past the troubles of today to continue to save for tomorrow.

There are three most common concerns regarding retirement planning these days and individuals need insight on how to resolve these worries, scale back the impact the economy has on one’s retirement accounts, and get back on track towards reaching your retirement savings goals.

Concern #1: Recouping Losses

It is a fact that retirement account values are down. Kiplinger’s Personal Finance reported that in 2008, more than 40 percent of workers in the United States saw their 401(k) account balance drop by 30 percent or more. This change toward the negative is definitely a cause for concern, but that doesn’t mean that you definitely won’t be able to retire on time. There are ways to recover from these dramatic drops in retirement account values. Depending on what your intentions for money in retirement accounts may be, income or inheritance, there are a few tips you can use to regain account value. Consider the following:

Good for almost all retirement accounts and all purposes:

· Change up your retirement strategy – Regardless of your intentions, with all the fluctuations in the market over the past year, an evolution of your retirement savings strategy needs to take place if it hasn’t already.

· Evaluate your risk tolerance – While younger investors have the time to ride the fluctuations in the stock market, those approaching or already in retirement should not have more than they can afford to lose in the markets. Be sure your investment strategy matches your investment objectives and your timeline towards retirement; if the money is earmarked for retirement and your soon-to-be future financial safety, then be sure the funds are safely and wisely invested.

If you will definitely need the money in retirement, consider:

· Rearranging the investments within a retirement plan – find a type of investment that is either faring better or holds less risk in order to not lose more money earmarked for retirement. Remember, if you’re down 50 percent in your account value, you will need to recoup 100 percent to break even.

· Incorporating alternative investments – If you do not have a lot of time left until retirement consider some investment alternatives such as municipal bonds, CDs and fixed annuities which offer low risk growth.

If you intended to leave your retirement savings as an inheritance:

· Consider buying life insurance – As a quick solution to getting money intended for family back, consider a life insurance policy. A life insurance policy can bring account values to pre-loss values or higher, and there are certain tax advantages that come with a life insurance inheritance versus an investment inheritance. To learn more, speak to a qualified life insurance representative.

Concern #2: Outliving Savings

It is hard to enjoy retirement if you are living in fear of running out of savings, but in light of the changes in the economy and the ups and downs of the market, the pre-retired and retired are finding their retirement accounts are coming up short. In many cases after having to delay or postpone retirement, people have realized they need to address savings shortcomings sooner rather than later to get caught up and meet their needs for retirement. To ensure your nest egg goes the distance, consider the following tips:

· Know how much you’ll need for income in retirement – A good estimation is that you will need 70 percent of your annual yearly income for each year you are retired. Be sure to factor in inflation, which has averaged 3 percent over the last 20 years.

When you’re done crunching the numbers, keep your overall savings target in mind and be aware of how near or far from that goal you are at all times to avoid outliving your savings.

· Know your monthly income – Try to keep track of all possible sources of income in retirement, however small they may be, in order to get an accurate figure for what you’ll be taking in each month. Common sources of retirement income include Social Security, retirement pensions and savings. After you’ve calculated this number see how much of a difference you’ll have to make up to hit your goal of 70 percent.

· Catch-up where you can – If you are lagging behind, consider catching up your savings with a catch-up contribution in your retirement plan. This provision allows anyone 50 or older to contribute extra money into a retirement account. The 2009 maximum contribution amounts for an IRA holder are $5,000 this year, and if you turn 50 in 2009 or older, you can take advantage of the IRS catch-up provision of $1,000 extra, bringing your maximum IRA contributions to $6,000 per year. Contribution limits for 401(k) plans depend on income and age, check with your financial advisor or plan administrator to determine the specific provisions.

Concern #3: Minimizing Taxes

It’s hard not to worry about taxes – they are a prevalent part of American society and are virtually unavoidable, which is why many Charlotte residents are concerned that taxes will go up and eat away at their retirement savings in the future. This concern is valid as taxes on retirement accounts can be a huge burden. To mitigate your tax liabilities in retirement, consider the following:

· Evaluate the tax advantages of your different retirement savings accounts – Create a plan for how and when you’ll withdraw funds for retirement from each account type, also known as income planning. By being strategic in your distributions, you can save money in taxes and fees as well as allow for continued growth in well performing savings accounts.

· Review your current retirement savings account – Not all retirement accounts offer the same tax benefits, so you may need to consider changing your retirement account type depending on how and when you are going to need the money in retirement. If you’re concerned about rising taxes, you may want to consider a rollover to a Roth IRA. Tax benefits of a Roth include:

· Not having to pay taxes when (and if) you decide to withdraw your savings (because taxes are paid when you contribute funds, not upon withdrawal).

· Monies earned on the principal in a Roth IRA grow tax-free, meaning they will retain their value better than a traditional IRA or 401(k) that will be subjected to taxes.

· The absence of a Required Minimum Distribution – 70 ½ is the mandatory age by which you must begin taking funds out of a retirement account. This can be helpful if you don’t need your retirement funds right away or would like to leave the money in the account as a “stretch” IRA to give to your family when you pass.

In this market, being afraid and doing nothing won’t get you anywhere. Overcoming worries and getting a good grasp on retirement accounts is the only way to pull yourself out of the economic black hole and get back on track to retirement saving.

Chris Hobart is founder and president of Hobart Financial Group, Inc., an independent financial advisory firm based in Charlotte, North Carolina. As a retirement planning and 401(k) rollover specialist, Hobart assists individuals with the transition into retirement. Hobart is a Registered Financial Consultant (RFC?), Investment Advisor Representative (IAR), and Chartered Senior Financial Planner (CSFP). In 2008, Hobart was named as one of the nation’s top independent financial advisors and was a finalist for Senior Market Advisor Magazine’s “Advisor of the Year” because of his commitment to excellence as a leader in the retirement planning profession and within the Charlotte community.

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