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Retirement Planning: Old Thinking Was Not the Problem January 21, 2009

Posted by retirementwithaplan in retirement.
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Every move you made was suddenly suspect, open to the rigorous criticism often reserved for the Monday morning quarterback. What you saw as tried and true in your investments suddenly seemed old and tired, a falsehood perpetrated at the expense of your hard-earned money. It was. But the thinking was solid even if you chose not to listen.

There will be a good deal of hand wringing well into 2009 and with it, some suggestions on how you can do better in the future. Was what you did, the investments you chose (that tanked), the 401(k) plans you funded, sometimes even maxing-out (that lost boatloads of retirement dollars), necessarily the wrong thing to do? Some folks think so.

Tim Middleton over at MSN Money published five ways for you to improve your 401(k) plan’s performance, the first of which is a no-brainer. He suggests that you no-longer max-out your 401(k). This so-called max-out provision in your 401(k) has been for most of us nothing more than an unattainable target. 012109_tarfullNot fully funding your plan has not been a problem for almost 90% of us in the past and now, it has less people wanting to hit that target number (percentage) now than ever before.

Mr. Middelton, who refers to 401(k) plans as a company friendly and nothing more than a low cost imitation of what pension funds do so successfully bemoans the fact that many of do not have access to exchange traded funds in those accounts, that we are unable to short sell stocks and that frequent trading, while sometimes allowed in some plans often discourages it with high fees.

The suggestion that we drop the buy-and-hold approach in favor of backing new ideas hinges on our ability to develop new ideas, embrace the risk associated with them and be prepared financially to pay the consequence (or reap the benefit of) our actions.

If there were not so many uninvested and under-invested participants in their retirement futures, we would have no need for “some consultant’s broad matrix of investments”. But there are and we just have to realize that there will always be those who want to be part of the idea but do not want to spend their entire lives juggling new tidbits of information, parsing strategies, and focusing too much time on these decisions. It’s wrong but it is what it is and new investors, as Mr. Middleton’s column is called, should take advantage of these broad investments.

He then goes on to suggest diversification with other retirement accounts. This is good idea but not one a newbie should undertake. Many folks have access to either one or the other, a 401(k) employer sponsored plan or an Individual Retirement Account (traditional or Roth). You may use your 401(k) at work but he criticizes the limited access to other products that could help you suggesting that if you do open an account such as this (IRA or Roth IRA), you do it at a brokerage.

That access will come with a cost and Mr. Middleton seems to gloss right over that fact. Yes, your employer sponsored plan might be limited, but it is, in almost every case, a cost-effective way of funding a retirement account. He even mentions annuities as a form of investment for those who make well into the six figure income range and a Roth, because of its advantages in growing after-tax investments (the growth is taxed but the principle is not), although the later is faced with income limitations.

Some other suggestions he offers include trading stocks in a taxable account. I still believe that trading stocks is the last funded account you should have, an account that Benjamin Graham called a Mad Money account (funded once, traded at will but never re-funded – once its gone, the lesson should be learned). Although I believe that you should keep index funds in a taxable account outside of your retirement account. The lack of trading lowers the tax implications of such an account and with capital gains still low, paying for the growth of these funds now might see you in a much better position later.

Bonds took a hit in this latest cycle of financial misery but were not hit as hard as stocks. But this is not the way it is supposed to be. When stocks get hit, bonds are the investment of choice. Still, the idea of a conservative approach in your 401(k) has its proponents. And they are pushing target-dated or life-cycle funds. If you should be lured into this type of investment, pick a target date twenty years beyond where you would like to retire. This keeps the bond portion of the investment lower longer. (There is still no solid evidence that these work with any success. Just keep that in mind as allocate your retirement investments.)

His last suggestion is to be flexible. Better yet, be realistic. While buy and hold may not always be the right choice – things do change from markets to investor attitudes, long-term is still the way to go when planning for your retirement.

Your 401(k) is not in a crisis, the markets are. I still believe that if you made decisions you were comfortable with 15 months ago, they might still be okay choices. Everyone lost. Don’t make choices for your future based on short-term recovery options. Not just yet.

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