Thursday, January 24, 2008

Retirement Planning 2008

As banks book losses and high ranking financial services executives pursue other interests, people still need to prepare for retirement. Here are a few things to think about.

Market Volatility. The downswings of the market are what the long term part of long term investing is all about. Unlike an elementary school soccer game, where everyone gets an award, the stock markets are not meant to build self-esteem. You will lose as well as win. Maximize your chances to win by focusing on the long term. Avoid panic selling, and consider judicious purchases during market swoons.

Diversify. The future direction of the stock, bond and other financial markets gets murkier by the day. The smart play is to diversify your investments. That way, you place a number of different bets to multiply your chances of success while reducing the risk of a big loss. Concentrating one’s bets was the strategy a lot of investment and commercial banks pursued with mortgages and leveraged buyout financings. When you swing for a home run, you have a good chance of striking out. There were many strike outs this past year. Most likely, 2008 will be a year in which many investors hit singles, at best. Diversify your investments.

Step up your savings. With the short term direction of the stock markets uncertain, one way to boost your retirement portfolio is to increase the amounts that you save. Maybe that, in your mind, calls for sacrifice. Well, retirement with only limited resources also calls for sacrifice, maybe a lot of it. When you’re old, perhaps ill, and unable or unwilling to work, sacrifice will be painful. Save more now and buy some peace of mind. You’ll have only a finite amount of income during your working years, and if you don’t save some of it, you won’t have much of a retirement.

401(k) Changes. Employers are now starting to automatically enroll new employees in 401(k) plans unless the employees opt out. It used to be that employees had to opt in, and large numbers of them didn’t. So they missed important opportunities to build wealth for retirement. 401(k) investment choices are now often being simplified, which should make things easier for participants. If you haven’t enrolled in your employer’s 401(k) plan, enroll. If you’re automatically enrolled, don’t opt out. Most employers are withholding only 3% of automatic enrollees earnings, and perhaps making a matching contribution in the same amount. That’s not enough for a solid retirement. You should try to save at least 15% to 20% of your earnings, either inside or outside a retirement account. See

Many 401(k) plans offer lifecycle or target date retirement funds as investment options. These funds allocate your savings to age-appropriate mixes of assets. Your money is invested aggressively if you’re young and have decades to go before retirement. As you grow older, the mix of investments is gradually made more conservative to solidify your gains. This is what you should be doing anyway if you manage your money yourself. The lifecycle or target date fund does the work for you, so your life is simplified.

IRA Contribution Limits. In 2008, you’ll be able to contribute up to a combined total of $5,000 to your traditional and Roth IRAs, or $6,000 if you are 50 or older (including those who turn 50 during 2008). You can still make contributions for 2007 up through April 15, 2008 (but the limits are $4,000, or $5,000 if you were 50 or older in 2007). If you participate in any employer-sponsored retirement plan, such as a 401(k), 403(b), SIMPLE IRA or SEP-IRA, contact your plan administrator for information about the plan’s contribution limits and any matching contributions.

Proprietary reverse mortgages. These mortgages are large reverse mortgages, ones that exceed the $363,000 loan limit for FHA-backed reverse mortgages. Most reverse mortgages issued today are guaranteed by the FHA, which is a great comfort to the lender. But the FHA won’t back reverse mortgages above $363,000. So banks are starting to offer proprietary reverse mortgages in higher amounts (perhaps as much as $10 million, if you have a mansion that would support such a loan). Like any reverse mortgage, these jumbo loans let you pay off existing loans, take out additional equity as a lump sum of cash, and/or establish a line of credit. The loan and interest are repaid when you die, move out permanently or sell the house (or mansion). You don’t need to make monthly payments. In this way, a reverse mortgage can simplify your life.

The downside is that perhaps all of the value of your house will go to repaying the reverse mortgage. Your heirs may get nothing from the house. You also need to safeguard the cash or credit line that the proprietary reverse mortgage gives you, because you probably won’t be able to borrow against the house again. The reverse mortgage will have a first lien on your house and will probably preclude another home equity loan. These are serious considerations, and you should think carefully before taking out a reverse mortgage.

Animal News: is the Mayor a dognapper?

No comments: