A Personal Bailout Plan For Retirement

MoneyWatch.com's Carla Fried: If Retirement Is Near, You May Need To Create A Personal Bailout Plan

(CBS)  Written by MoneyWatch.com Contributing Editor Carla A. Fried.

---

Perhaps, in retrospect, the nation shouldn't have staked so much of American workers' retirement security on something as vulnerable as the 401(k) plan. Perhaps you personally wish you'd saved more out of each paycheck or at least started saving earlier. And couldn't you just kick yourself for lacking the foresight back in 2007 to pull your 401(k) money out of the plan's stock funds and move it into the plan's super-safe money funds or stable value funds?

But perfect hindsight can't help anyone now. The market crash has vaporized decades' worth of personal 401(k) saving, and there is no federal bailout in sight for the victims. Any reform of 401(k) plans that might come about will arrive too late to help. If you are in your 40s or younger, you probably have time to rebuild your savings before retirement. If you are in your 50s or older, and you had a lot of your 401(k) money in the stock market, you likely face a far grimmer truth: You may not be able to retire as early or as comfortably as you had planned

But there is a way out of this mess. In essence, you have to create your own personal bailout plan. It won't be fun. It involves making some serious late-stage changes to your plan, and committing to do more in the years you have remaining in your career: save more, work longer and invest more carefully.

Save More. Don't count on the markets to dig you out of your retirement hole. It would take a 100 percent stock rally to merely get back to the 2007 market high. That means you need to commit to regularly putting more of your income into your retirement savings.

"There's no magic bullet here," says Frank Armstrong, author of The Retirement Challenge: Sink or Swim and president of Investor Solutions, a Coconut Grove, Fla. financial-advisory firm. "You need to save more to have more, it’s that simple." Financial advisers recommend socking away 15 percent of your pretax income for retirement annually; Americans tend to save about just half that amount.

Ironically, the plan that got you into this hole-your 401(k)-is the best vehicle to use when trying to save your way out of it. Yes, it's true that the 401(k) system is seriously flawed. The country needs a retirement strategy that shares risk more evenly between employers, employees and financial institutions. But if you're over 50, you can't wait for Congress or Wall Street to invent something better. You need to save as much as you can right now.

Anyone 50 or older is allowed by law to save up to $22,000 a year in a 401(k). That's $5,500 more than younger people can. Push yourself to take full advantage of this so-called "catch-up contribution," if possible.

If your company offers a variant on the standard 401(k) plan, called a Roth 401(k), give it a serious look. You won't get an initial tax break for investing-you have to make your Roth contributions with after-tax income. But once you retire, the money you pull out of a Roth 401(k) is 100 percent tax-free. If you put your money instead into a traditional 401(k), you'd owe income tax on 100 percent of the money you withdraw from the plan.

Given the mega federal budget deficits that will need to be repaid in the future, it’s likely that tax rates will only go up from here. This makes investing in a Roth 401(k)-paying now so that you’ll avoid them in the future-all the more alluring.

Committing to saving more will require you to spend less. That's not just an important step to take today - it will be vital in your retirement years too. "Saving more today also has the added benefit of training you to live on less," says T. Rowe Price financial planner Stuart Ritter. "That's going to help in retirement, because you will have a less expensive standard of living to maintain."

Work Longer. Working longer may seem like a death sentence, but you won't need to work forever to get your retirement plans back on track. The typical retirement age is around 63 today; you can make up a stunning amount of lost ground if you push your retirement date back to age 67.

Three simple math equations are behind this delayed-retirement fix:

Work longer and you’ll have an easier time delaying when you start drawing your Social Security benefit. Every year you forego taking the payout from age 62 to age 70 boosts your eventual benefit by eight percent. Delay five years, and you've banked a 40 percent higher Social Security benefit, which will help you get along in retirement.

Delaying retirement will help your portfolio in several important ways. Your investments will have more time to recover from the recent losses. They’ll have more time to grow before you start withdrawing money. And you'll reduce the number of years you'll need the stash to support you in retirement. Think about this: if you retire at 60, there's a very good chance your retirement fund may need to support you for 30 or more years. Put off retirement to 70, however, and you'll dramatically lessen the pressure on your retirement fund.

If you can keep saving during your later work years, you will give your retirement account a tremendous lift. T. Rowe Price estimates that someone with a diversified portfolio who works until 67, delays taking Social Security and continues stuffing 15 percent of pre-tax income into savings can end up with 44 percent more retirement income than someone retiring at 62. Keep working to 70 and you could boost your retirement income by nearly 80 percent.

Invest More Carefully. While saving more and working longer are the crucial drivers of a retirement rescue plan, it's also important to have the right mix of stocks, bonds and cash in your retirement portfolio. That's a lesson many 401(k) investors learned the hard way, since many had tilted too heavily towards stocks last year, sometimes unknowingly.

It's still important for people over 50 to keep a chunk of their 401(k) money in stocks. With today's longer life expectancies, a person in his 50s today has an excellent chance of living another three or four decades. While stocks will likely be volatile over that time period, they are also likely to outperform other investments.

Don't plan to double down on stocks to "get it all back fast," however. If you had 100 percent in an S&P 500 stock index portfolio in 2008, your portfolio sank 37 percent. With a 60/40 split between the S&P 500 and bonds, your portfolio would have held on much better, losing 22 percent.

In your 50s, financial advisers say it's smart to keep 50 percent to 60 percent of your retirement money in stocks. This will help the portfolio beat inflation over coming decades. The rest of your 401(k) funds belong in your bond fund or the supersafe money funds or stable value funds for stability.

Fixing your retirement fund will take some sacrifice. You'll need to find a way to save a lot more. You'll have to stay on the payroll longer than planned. And you can't recklessly stake all your hopes in a stock market rebound-you still have to be prudent.

But making sacrifices isn't the same as giving up. Even if you're in your 50s now, you can salvage a decent, comfortable and dignified retirement. Your most important tool in the rebuilding process is your willingness and ability to keep working. But the second most important tool, ironically, is the one whose statements you probably can't bear to look at these days. Until something better comes along, that's your 401(k).

[Theophrastus]

"Retirement," "Bailout plan"? The worst of it (everything in the news presently gone awry)has yet to be dumped on us. Whatever typical plan you come up with, it should include how to get to the souplines. The only sensible retirement bailout plan is an uncharted uninhabited island somewhere around Indonesia. "Retirement bail out!," give us a break!

[My401kPro]

I fear that the authors of the "60 Minutes" segment on 401(k) plans will have as little initiative in reading my comment as they did in researching the real problems with investing in these plans. I have spent 40 years in both directly managing retirement plans and offering an affordable subscription service for 401(k) participants and IRA owners. As such, I will say with great confidence that there are 2 dominant problems for investors in regard to investing in these plans. 1. Is a lack of meaningful investment assistance (and I specifically refer to those who simply say "buy and stay the course" as not meaningful assistance) - 2008 is an example of the value of that advice. And 2. Is the almost total lack of effort on the part of participants in those retirement accounts to get assistance. I equate their effort with the effort, or lack thereof, of those who are planning to start exercising or dieting. If I am offending anyone by saying that, you statistically probably deserve it.
With or without the bear market we're in and from which we will not recover for 8-10 years if history is a guide, we are facing an enormous investment crisis. My firm wrote a report on that in July of 2008. Email us at info@my401kpro for a copy of it.

[401kmaster]

Most of these people on here are the lobbyist friends there not even real people. He looked like a deer in the headlights on the show and know he's trying to make up for it. By the way this is not a liberal or republican issue. This is America's problem I'm a conservative myself and known about hidden fees for since Clinton era. The Democrat congress just turned down this year the new full disclosure law. So my point is this story has nothing to do with poliotcs. If this isn't fixed in 10 years the baby boomers getting ready to retire will be in poverty and this issue if not tackled soon could be bigger than the sub prime mortgage crisis. Every person has the right to have upfront fees for there retirement remember 2% extra could eat up 50% of your total retirement. Would you invest with someone if they told you that they will help you but take 50% of your money. Again to the advisors that are putting these mutual funds in these 401ks and don't want to have any blame your wrong. Use passive low cost index or institutional funds. you wont because that's how you get paid from these active over priced funds. Passive low cost is the way to go. The leaders in the 401k market trying to tackle this problem a conservative people. Along with democrats.

[gfulmore]

As another comment, the lead of the 60 minutes story seemed to indicate that the story was going to cover the hidden fees angle. That is nasty, as it is almost impossible for the average worker to find out that he/she has been paying hidden fees. Representative Miller talked about that a bit. But it is the whole mutual fund industry that is culpable. When returns are good, we can care less that they are swiping hidden fees from us along the way. Read "The Battle for the Soul of Capitalism," by John Bogle for the lowdown on all this. Someone calls the mutual funds industry the biggest "skimming" operation in history.
But, in the end, if you make some money in your 401(k) over time, you will be pleased. Even at 7.2%, one should double his/her investment every 10 years. That beats a kick in the pants.

[gfulmore]

Let's not lose vision of the fact that 401(k) accounts are waaaayyyy better for most workers than the old pension plans were, mainly because few people work very long at the same company any more, and because companies really did not have to put very much into the pension plan in the first place. If one was in a union, then they had some cards to play; otherwise, company pension plans could be awful. Plus, how many of them -- like in the steel companies -- have defaulted, with the remaining money to the government's last-resort guarantee fund. In these cases, workers might get half of what was promised!
401(k) plans offer employees an immediate pay raise, since the income is deferred and not taxed. (I think payroll taxes are taken out first). The money in the accounts belong to the employees, not the companies. Balances are transferable when one leaves the company. Balances can be rolled into IRAs for individual control.
401(k)s have worked well for my wife and I, as neither of us would have ended up with company pensions. Beware of the opponents of 401(k) plans. They want to return to the company pensions, where all kinds of stuff was happening in the background with the saved money, I'm sure.

[debar57]

Most are just too greedy. Instead of being happy with a 4-8% gain per year most are looking for an easy fix and moved all their money into the 20-30% gainers. If it seems too good to be true...

[debar57]

I agree that most people don't understand how their 401K works, however, when the experts tell you to "stay the course" because the markets will bounce back, a lot of people followed that advise. For me, I lost about 50% of my 401K in the late 90s, the last time the markets (tech stocks mostly) took a dive. I "stayed the course" and even though the market went much higher than what it was when I lost the 50% I never even got close to where I was before the dive. Learning that you had to look out for yourself, when the economy started going south this time, I moved all my money into secure bonds and guess what? I'm now only about 20% down from where I was in the 90s. Live and learn!

[AmyVanTorren]

I've been debating switching to Roth IRA as well. There's just too much uncertainty these days with standard retirement plans. This is a good introduction about roth ira, but if you want more in-depth information about roth ira, read rothirarules.net , they have some good info on basic roth ira do's and dont's, investment options, taxation

Cheers,

[BlueCollarDollar_com]

Although most of the advice is good, a clear delineation between what is savings (something you put in a bank, CD) and investing (something you put in a 401(k) or IRA) should have been made. I believe this has gone a long way towards creating more angst. Folks thought that the money they put in would always be there. The growth of those dollars was what was reaped after putting the money in. The principle, many thought, even if they didn't realize it, would always be there. When what they put in disappeared along with all of the money they made, they were shocked.

I have no problem with going conservative - for those who cannot tolerate any risk. But the old rules apply in even these situations. Age appropriate investment risk using dollar cost averaging, avoid unproven or new financial tools (target-dated funds, ETFs) and get your personal financial house in order by using savings, spending discipline or otherwise, living with your means and you will weather future storms (and there will be more) and profit when the financial weather clears - and it will.

[F1RSTCH1LD]

Your story about 401(k)'s omitted one important party. A company 401(k) fund is a little like a blood bank in that it's the only game in town for the company's employees. In the same way that health departments must ensure a safe blood supply to people who depend on their blood bank, a company must ensure that the 401(k) they offer to their employees is a safe vehicle in which to invest for their retirement. As a former HR director, I know that most businesses either select firms to administer their 401(k) plans or choose the funds for their internally administered plans. Either way, it is the responsibility of a business's management to ensure that their 401(k) is a safe, good quality plan, one in which they themselves will invest. I wonder how many of the people you interviewed were let down not only by the 401(k) funds in which they invested but also by an employer who did not offer a safe investment vehicle to their employees?

[AskMatt]

I am a financial advisor with a focus in the retirement plan arena. I was very disappointed by Mr. Wray's answers. I believe it is not the individual investor's fault for what has happened over the past two years. If we are going to put the blame tag on any body it should be the large mutual fund companies and the employers. Both have taken the lowest bid approach to providing benefits for the employees ? look where we are now!

For a successful retirement plan or any benefit for that matter, companies should embrace an environment of education. Find benefit providers (like myself) that provide ongoing education and benefit reviews for all employees. If the individuals near retirement had the correct education and guidance, they would not have had assets allocated in high risk areas and been in a position where retirement was an option.

It is not the greed of the individual but the greed of the mutual fund industry and employers. Employers need to find advisors (like myself) that have a value added platform for employee benefits.

[jmulliken]

I found Mr. Wray's comments very evasive and quite arrogant. Now that the 401Ks have been robbed and threatened the retirement opportunities for average, middle income working people; people who worked for employers trying to do the right thing by setting up retirement accounts for their employees who would otherwise depend solely on Social Security, he has the audacity to say it's the employees' fault because they didn't manage their investments? 401Ks were promoted as being the answer to help people who didn't own successful businesses or work for the government, so they wouldn't have to depend on just on Social Security, which has also been robbed by Congress to be given to people who didn't contribute to it. Greed ... just plain old fashion GREED is the cause of putting the middle class, working people at financial risk for their retirement years.

[RyanPH]

Wow, I remember when my father used to watch 60 minutes as a news source. I have been watching 60 min since i was a chilg and have found its "new" reporting and "both side of the story" so lack as of late it is right up there with dateline and or Entertainment tonight. Congratulations! ! At least you have cut Katie Curric from the roster. I used to think of 60 minutes as a bench mark of what new should be and in depth. But I I am sorry, I am a recent grad from grad school and unemployed. Yet the stories the last two weeks i.e. the county hospital in las vegas and the 401 K story, really gee does 60 minutes have an agenda? I would love some health care and that my own 401 k wasn't dwindled. . . but A) I gambled wanting big return B) I could have stuck with my job with health care, but wanted to go to school. But I find your story when there are votes being lobbied so transparent, you have lost a viewer. Good luck since I am 29 and your viewer ship is slanted older. . . but maybe you were thinking you would pull in the rolling stone crowd since that is what you reporting has become.

[wootat]

I find Mr. Wray's commets amazing. I'm a truck driver for the last 25 yrs, I'm 55 an have worked since I was 14. I worked for ma bell for a number of years( until de- regeulation.) I like
my job very much, but I'm not a stock broker
Maybe Mr.Wray would like to drive my truck everynight so I can pour over the daily stock reports

[olyap]

I was very disappointed with the "dummying down" slant of this story. It sounds as if you have a grudge with american corporations that provided a financial alternative to the typical savings route, which was putting the hard-earned money into some kind of instrument that gave me a better rate of return than the savings account in the bank. When I joined the workforce I understood that when I got my paycheck I had alternatives to bank-accounts when it came to saving and investing. And therefore with those alternatives comes the need to be totally aware and knowledgeable of what is being offered to you, and the risks associated with those alternatvies. Most folks went with the tide and didnt exercise their choice to 'change' their 'investment direction' when it was needed. The 401K was NOT a savings bank. What where folks doing if they didnt understand that difference ?

[floridaterp6771]

I too have lost alot of money in my 401K. What I find offensive is that Congress is holding hearings on the misdeeds of Wall Street and their impact on 401K funds while at the same time Congress is and has STOLEN $billions from Social Security and replaced it with and IOU. If any corporation had raided pension funds the way Congress has raided the SS System the executives would all be in jail. It's time to create a TRUE trust fund for social security and remove it from the hand of Congress.

[DrinianPress]

My latest novel, McGowan's Retreat, was just released. When I wrote it, I thought that it was speculative at certain points, but I was wrong. My characters concluded that the market failure has served as a means to raise the retirement age for Boomers. Maybe there is no retirement in sight!