Retirement Plan Adjustment Options

Getting Your Retirement Plan Back on Track

By: Pam Grundy

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One of the most distressing components of the current economic crisis has been the dramatic drop in money invested in 401K programs. People who are in their twenties or thirties are well-advised to hold tight, since it is nearly assured that eventually the market will spring back. People who are in their forties, fifties, and sixties face a real problem however:
How do you get your retirement back on track when time is running out, and the losses have already been substantial? Should you delay retirement? Should you move the money out of your 401k and into something else? How can anyone make sane investment decisions in these uncertain times?
All is not lost. It is possible to rethink retirement, and adjust a retirement plan to fit current market conditions, without taking undue risk.
Here are some basic steps anyone can take or consider to get a retirement plan back on track:

Choose Safety

Before the housing crisis created the current stock market mess, a 2% return sounded pretty sad. Now, compared with a 33% loss, a 2% return looks pretty good. People who like to put their 401ks on auto pilot and forget about them, should take this opportunity to review their risk profile. Most companies provide access to software that will do this easily and painlessly. Take the time to check out how your investments are distributed within the plan, and move what you can to low-risk options until the economy improves.
Read 'Recession-Proof Your 401k" for more information on 401k's.

Build Liquidity

The biggest threat the recession poses to people nearing retirement, is job loss. Before the economy soured, lots of people nearing retirement diverted as much of their earnings as possible into their 401ks. Now is a good time to reconsider that strategy.
Most employers match contributions only up to a certain percentage, typically between 3% and 7%. People who are contributing more than the matching portion should consider cutting back to the matching percentage only, and then diverting the rest to a liquid, high-yield savings account; like a short term CD or promotional rate online account. Don’t take a distribution to do this, but start building up liquid savings equal to three months pay. Six months is even better.

Reinvest Dividends

The return on any given stock can be greatly increased by reinvesting dividends. People who are nearing retirement who own stock outside a 401k, should consider reinvesting their dividends if they aren’t already doing so. This will maximize the amount available at retirement.

Re-Imagine Retirement

A surprising number of people nearing retirement, never really think through what their expectations are or what a ‘normal’ retirement day will look like. Most people frame the current crisis as “Will I be able to retire or will I have to keep working?” This question ignores more creative options. Retired persons have accumulated skills and knowledge that make them good candidates for successfully starting and running small consulting firms or home-based businesses in their areas of expertise.

Does retirement look more possible if a small income stream is added by means of something that is already fun or interesting? Right now, a host of books are hitting the shelves which encourage Boomers to re-imagine themselves at retirement, and try new things, rather than just banking on doing nothing at all or spending retirement savings on travel.

Examine Expenses

If it’s been awhile since a thorough review of the household budget has been done, now is a good time to go over it with a fine-toothed comb. Any fat that can be cut and the money diverted to paying off debt or paying off the house (if it is still mortgaged), will make retirement look a lot more possible. Some personal financial advisors advocate paying off the house before anything else, in preparation for retirement, since the mortgage payment is typically the largest monthly expense most people have. Unsecured debt that can’t be paid off by retirement should be addressed now, with the help of a credit counselor or attorney if necessary.

Create a Plan

Stewing and fretting about the recession is natural, but not helpful. While no one can predict what will happen next with regard to the economy, drawing up a financial plan can make a huge difference in terms of peace of mind, and it also increases the potential for real results. Many people never consider what their actual financial goals are. Pick a goal, then make a five year plan for reaching it. Get help if necessary. Goals should be concrete and the steps for reaching goals should be detailed. “I will pay a little more each month on the mortgage,” is too vague. “I will pay the $100 extra each month necessary to pay off the mortgage by November of 2019,” is much better.
To find out how much additional money is necessary each month to pay off various debts, check out the calculators at Bankrate.

Hope for the Best, Plan for the Worst

It helps to imagine the worst possible outcome and have a plan in place for how that will be handled. For most people, the worst that can happen at midlife is job loss. Start building savings now, and think about what will happen next if the worst occurs.

Is there another way to earn money?
Can courses be started now, part-time, to prepare for a change if necessary?
Can information be gathered and reviewed about home-based business opportunities?
Can a room or basement be rented out to generate income?

Be creative and honest, and get some ideas in place. Brainstorm, create a plan, and then hope you don’t have to use it.

Conclusion

The current economic downturn is scary for people who are close to retirement age; but often, simply taking the time to review options, re-imagine what retirement is, and get a contingent plan in place, is all it takes to recoup a little peace of mind. Getting back that 33% you lost in the market might not be possible, but retirement might. Taking the opportunity to reevaluate what retirement means to you and how you can still get there, may well signal the start of an exciting new phase of life.

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