Times can get tough. Loss of a job. Stock market crash. When times get tough will you be ready?
Get ready now for tough times ahead.
Rainy Day Fund – Emergency Cash
Have a rainy day fund – it can’t be said enough. You absolutely need a financial reserve that you can draw on when times get tough. Financial planners and advisers have told us to set aside three or six or nine months worth of living expenses in a rainy day fund — just in case. With a rainy day fund you don’t have to raid your 401(k), IRA or insurance policy to make ends meet. All of the Prosperity Treks have a step for building a rainy day fund – it’s that important.
When the Market Goes Down It Can Take a Lot of Time and Effort to Get Back to Even
When the market drops the big question is when will you recoup your losses in your 401(k) plan or your IRA. Well, let’s say you had $100,000 in your account before the market dropped and it was worth $65,000 at the end of the market bust. It would take, assuming a 5% nominal pretax return and no further contributions to your retirement account, nine years for your retirement account to grow back to $100,000. However, that’s in future dollars and not adjusted for inflation. To get the same purchasing power as $100,000 today, and adjusting for inflation, it would take more than nine years.
Now let’s assume that you contribute $4,000 per year to your $65,000 account and it grows 5% annually. It would grow back to about $100,000 in just 41/2 years. Now, if you have the ability to double the amount you invest to $8,000 instead, it would grow back to $100,000 in three years.
The Defined-Benefit Pension – An Endangered Financial Asset
There are predictions that the defined-benefit plans will disappear over the next 25 years. To accommodate that stark prediction you might want to think about a Plan B if you have a traditional pension plan. At present, there are some 44 million workers and retirees who have a traditional defined-benefit pension plan and there are more than 29,000 such plans in existence, according to the Pension Benefit Guaranty Corporation (PBGC), the federal corporation that insures defined benefit plans.
But many of those plans, even with the latest pension law changes, are in deep trouble.
Here’s what consulting firm Mercer said in a recent release: “The chaos that has been observed in the world’s financial markets over the last 12 months has had a major adverse impact on pension plan funding and will negatively impact corporate earnings in 2009. Pension plans sponsored by the largest U.S. companies have seen a decline in funded status — the ratio of assets to liabilities — from 104% at year-end 2007 to 75% as of Dec. 31, 2008. This equates to losses of an estimated $469 billion over 2008, causing an aggregate surplus of $60 billion at the end of 2007 to be replaced an estimated aggregate deficit of $409 billion at the end of 2008.”
And the bad news continues: The PBGC noted recently that 4% of all single-employer pension plans, or 1,225 companies, terminated their pension plan in fiscal 2007. In addition, the PBGC became the trustee of 110 “insolvent” plans that were sponsored by financially distressed employers that same year.
According to the PBGC, 75% of plans ended in what it calls “standard termination” as opposed to financial distress were small plans with fewer than 25 participants. While it’s important to check the financial health of your defined-benefit pension plan no matter whether you work for a large or small employer, it would appear especially important if you work for a small firm.
Small-plan sponsors often terminate their plans because the business owner dies or sells the business. Sponsors also shut down their defined-benefit plans as part of retirement-program restructuring or because of the expense of the benefits, adverse business conditions, the expense of plan administration, the sale of the company or liquidation.
The 401(k) Match – Another Endangered Financial Asset
Many companies have eliminated their 401(k) match because of bad business conditions. The takeaway: You may need to make up the difference and you may need to forget about your company putting back the match for a long time to come.
It’s Taxing to Worry About Taxes
Many pundits warn about health-care expenses in retirement, suggesting that the average 65-year-old couple retiring today would need more than $200,000 set aside to cover such expenses. But according to research from Securian Financial Group, taxes consume a bigger slice of retirees’ spending pie than any other expense.
High-net-worth Americans, those with $1 million, paid an average of $25,226 in personal income tax per year. When you add in real estate, capital gains, and personal property tax, the total average annual tax expense was $40,578 or about 4% of their net worth. By contrast, actual health-related costs came in at $6,681 on average per year, or less than 1% of their net worth.
The takeaway: Make sure you work to reduce your tax bills, not just cover your health-care expenses in retirement.
Revisionist Portfolio Theory
It’s almost tradition that we should put 60% of our money in stocks and 40% in bonds. When times are tough it’s time to rethink that. It’s time to address the need to transfer and insure risk long before we discuss the reward side of the equation.
With risks to benefits and expectations of times of toughness ahead it’s time for you to get tough – set up a rainy day fund, pay attention to your asset allocation, rebalance your portfolio and mind your future taxes. Get tough for tough times.
Related Information in Prosperity View
- Our Low Savings Rate – Is our Government an Enabler?
- Saving for Retirement Being Hurt by Economy & Attitude
- Workers and Employers Are Trying to Reduce Retirement Plan Fees
- Buy an Annuity and Delay Social Security – GAO
- Will the Stock Market Let us Retire? Where did the Equity Premium Go?
- Expenses and Debt – Adjusting to the Great Debt Contraction
- Retirement Benefits, Accounts, Longevity: Delay, Change Lifestyle
- Our Retirement Planning Problem: We Make Mistakes on How We Earn, Spend, Borrow, Save and Invest
