It's almost certain that your retirement plan in 2009 looks a lot less promising than it did just a year ago. With the stock market still in the tank and employers cutting back, most Americans are rethinking what it'll take to get them safely into their golden years. A Towers Perrin survey taken at the end of 2008 reported that 82 percent of U.S. workers have been personally affected by the economic downturn. A whopping 91 percent said their company has been affected, and that the situation worsened dramatically by year's end. An August poll showed 14 percent of respondents planned to retire within the next two years. In December, the number dropped to just 9 percent, and the situation and market economy have hardly improved since then. Below are a few tips for dealing with some of the less savory trends in the new financial reality:
I need money now. Should I take out a 401(k) loan?
The answer is no if there's any way you can avoid it. Tapping your retirement ahead of time is always a bad idea, but if your financial situation forces you to dip into your 401(k), a loan might be the best way. If you do, know that you aren't alone. Some 20 percent of employees eligible for 401(k) plan loans have used one, according to the Profit Sharing/401(k) Council of America. The average outstanding balance is $7,600. The basics, from the PSCA: Plans typically let you borrow 50 percent of your savings up to $50,000. You'll probably need to repay the loan in 60 equal monthly payments over a five-year period unless the loan is for a home mortgage, and repay via payroll deductions. Interest rates vary, but they're often the "prime rate" plus one percent. Also, multiple loans can be taken out, so it's best to borrow as little as possible. Lastly: Don't quit or get fired. If you do, the loan will come due in most cases. I'm leaving my current job. What should I do with my 401(k)?
If you're leaving an employer (by choice or otherwise), the most obvious rule is don't cash out of your retirement plan. You'll incur fees and pay taxes on that money. But what if you're unsure where you're going to land next? If you expect your next job will be with an employer offering a similar 401(k), it might not be a bad idea to simply leave money in your old employer's plan. "You get less expensive mutual funds through your employer's plan, compared to what you could get on your own," says Marina Edwards, a consultant at Towers Perrin. That said, there's absolutely nothing wrong with going the IRA route if your next job isn't on the horizon, and rolling over into an IRA works just fine. But your time might be better spent thinking about making sure your income is secure first. What happens to my 401(k) if I'm facing bankruptcy?
If the worst happens, your 401(k) is protected. Declaring bankruptcy is a tough choice, but it's also a spot where having assets in a retirement account can come in handy. It's a little-known fact that assets 401(k) plans are largely protected from creditors. The IRS can garnish from a 401(k), but creditors can't access it. Is now a good time to rethink owning company stock?
If there's company stock in your 401(k), it's probably a source of worry rather than comfort right now. It's a good time to check your exposure. Companies themselves have been cutting back on pushing stock on employees for years. That's probably for the best. Company stock is a terrible investing idea, since it's basically the exact opposite of diversification. If your salary and your retirement are based on the fate of a single company, the risks are simply just too high. Richard Thaler, an economist and author of Nudge: Improving Decisions About Health, Wealth and Happiness, notes that $1 of company stock is worth less than half the value of a dollar in a mutual fund because of the higher risks posed by being diversified. (The abstract for a paper he's citing can be found here).
Your 401(k) match is frozen. Now what?
If your employer cut your 401(k) match (a recent Watson Wyatt survey showed 1 in 10 employers have) the main message is to stay the course. Resist the temptation to ignore the fact that your retirement contributions are lower. Replace them with extra monthly contributions if you can, but no matter what, the key is to maintain your level of savings, match or no match. Also, remember that now isn't the time for long-term investors to hole up. Making long-term investments when markets are weak is the only way to scratch back losses taken during the bust. The baseline for savings in an employer retirement plan should be at least 10 percent, experts say, even if the employee has to go it alone. "Everyone can save 10 percent more," Edwards says.