Prepare for a worry-free future

In an effort to manage risk, some fund firms are reinventing the “balanced” funds that form the core of many investors’ portfolios. They might be creating new risks of their own.

View full post on WSJ.com: Retirement Planning

On my walk with a friend this morning, she informed me that her husband “sold everything” and put it in a money market fund. I was just convinced yesterday not to do that, but now I’m questioning again. My husband is 65 and plans to retire in three to five years. I’m 58. He has a 401-K through his work with Fidelity. It’s not huge, I think around $175,000. He lost around $35,000 recently because of all this mess we are in. He was advised by a young professional, after he looked at it, not to do anything. Leave things the way they are. I realize that the market will return eventually, but maybe not before he retires. I’m just wondering if we are doing the right thing. The young guy told my husband there’s nothing really “safe” right now. If we were younger, it would be a no-brainer, but now I’m starting to get worried, more worried I should say. Any advice out there?
Thanks. Yesterday my husband moved all of his remaining 401-K assets into a money market with Fidelity. We took an additional loss of $4600 yesterday. It’s not great, but we both were feeling relieved…somewhat. Now, today I am reading an article by James B. Stewart (Smart Money) and I quote: “Even if you managed to shift all your assets into gold and short-term Treasurys, it would surely be small consolation if nearly everyone else lost their life savings in collapsed MONEY-MARKET (my emphasis) funds and bank failures…..” I thought money-market funds were FDIC insured!!! I thought the money there would be safe. Please Gary, or whoever, help clear this up for me. I feel like I’ve aged 10 years in two days.

These companies give employees significant cash incentives to save for retirement.

View full post on U.S. News – Money – Retirement Planning, News, and Advice

Dennis Niewoehner is the author of “The Transition: Winning the 4th Quarter of Life”, a book on retirement planning and retirement advice, TheTransitionBook.com. Dennis Niewoehner reflects about his past and his role in the Colorado community, including his historical horseback trail rides from one end of Douglas County to the other. Niewoehner encourges people to do what they can to enjoy things in life. Filmed at Castlewood Canyon State Park in Douglas County Colorado.

Today’s marketplace offers lots of choices in terms of retirement planning vehicles. The 401(k) (or 403(b) for the nonprofit sector) and Individual Retirement Account (IRA) are two of the most common. While they share some similarities, the differences are more important for the impact they could have on the growth of your retirement funds. However, though the differences are clear, the question of which type of account is better does not have a clear answer. As you will see below, some features of the accounts may be perceived by some as advantages and as disadvantages by others. Investment preferences and retirement are personal matters, so you should weigh the options carefully before you choose an account that makes the most sense for you. In fact, if you can afford to contribute to both types of accounts, you should do so to round out your investment portfolio.
Tax advantages
The most obvious and impressive similarity between a 401(k) and IRA is the tax benefit. Money placed in both types of accounts is tax free until you withdraw and use it. More accurately, it is tax deferred. You defer the tax until you use the money. The same is true for money earned by these accounts-until you take it out, you don’t have to pay income tax on the earnings. Recent tax law changes also allow tax credits for certain types of IRAs under specific conditions. Check with your tax professional to see if opening an IRA to take advantage of such credits would be beneficial for you.
The tax benefits of an IRA are income-dependent. If you make more than an allowed amount in a given year, your contributions to your IRA may not bring any tax advantage at all. Furthermore, IRA contributions may not be fully deductible if you contribute to a 401(k) in addition to your IRA. Once again, it is smart to check with a tax professional so that you can plan your retirement contributions to maximize your tax benefits.
There is also a down side to these tax benefits. If you withdraw money from your IRA or 401(k) before you reach age 59 (and one half!), you will not only have to pay tax on the amount you withdraw, but will most likely be stuck with an early withdrawal penalty as well. The safest route is to not touch these accounts until you retire. If you must tap these funds, do so only with the advice of a tax professional so you are not surprised by unpleasant notices from the IRS come April 15.
Contribution Limits
Because the money you put into retirement accounts is tax deferred, the IRS limits the amount you may stash away. The amounts change based on your age and the rate of inflation (and the whims of Congress), but generally, $2,000 is the limit for IRAs and approximately $10,000 is the limit for 401(k) plans. Learn the rules and limits and consult with an adviser to learn how to maximize the tax advantages available to you.
Employee Benefit vs Individual Account
The biggest difference is simply that a 401(k) is offered as part of an employee benefits package, while an IRA is owned and administered by the individual account holder. This difference accounts for one of the major advantages of a 401(k) over an IRA: your employer usually matches your contribution to your plan up to a given percentage. For instance, if your contribute 2% of your pay to your 401(k) each pay period, your employer might match your contributions, essentially doubling your money. For many people, this benefit alone is reason enough to choose a 401(k) over an IRA if they must choose one or the other.
Freedom of Choice
There are also disadvantages inherent in the company ownership of the 401(k). Because more than one person owns funds in the overall account, a third party, usually an insurance company or other financial institution, administers the account. This results in less freedom for you in administrative options, such as changing, starting, or stopping contributions and in how your funds are allocated. For instance, company 401(k) plans might offer 10 mutual funds to which you can distribute your money out of the many thousands that are available. Because you are the sole owner and administrator of an IRA, by contrast, you can place the money in any investment vehicle for which you’re qualified. That freedom is essential for hands-on types who prefer to manage their own affairs and accept credit or blame for success and failure.
For some, this freedom is not an advantage at all; some people do not want to trouble themselves with asset allocation and mutual fund performance. If that describes you, a 401(k) would better serve your needs because your employer’s plan likely has an account manager watching its performance to maximize security and returns.
Whatever your preference, you are not limited to one choice or the other. Many people have both a 401(k) through their employers and an IRA. If you can afford it, contribute the maximum allowable amounts to both accounts. You’ll enjoy the tax advantages now and will be better prepared for retirement in the future.