Retirement Revise

Dean Hudgeons, senior vice president and location manager for Arvest Bank, sums up the inevitable results of the recent global economic downturn in a way far too honest and succinct for politicians, regulators and the speculators and bankers who were blamed for the downturn in the first place.

“No one could avoid getting hurt in the meltdown except for those who sold at the top of the market or who invested in safe havens like gold – and that’s not something many professionals recommend,” Hudgeons says.

With the real estate crash and a stock market that plunged to below 7,000, there was plenty of pain to go around  – even to people who felt their future and retirement were safely secreted away in 401(k)s, one of the private sector’s favorite retirement tools and generally considered one of the safest investments.

The section of the Internal Revenue Code that made 401(k) plans possible was enacted into law in 1978. The law was intended to allow taxpayers a break on taxes on deferred income. It has subsequently become a de facto replacement for many for very generous fixed-benefit pensions, an expensive product generally offered today only to government and union employees.

“There was pressure from the business community to move away from costly pensions,” explains Hudgeons. “The result is that pensions pretty much went away and the 401(k) became very widespread. 

Hudgeons says that people often make a common mistake with their 401(k)s.

“The reality is that most investors ‘turn it on’ and leave it alone,” he says. “Many don’t even read their statements. After the downturn, many began to pay attention. Until then, many people didn’t because they were just working and busy with their lives.”

Once some began paying attention and seeing the “pain” in their 401(k), they decided to bail out – even when the market was at some of its lowest points in decades.

“Many investors then missed the ensuing bull market that began in 2009 and continues today,” he says. “That’s why there is still so much cash sitting on the sidelines. Some people missed the great recovery of the stock market. Most losses in a person’s 401(k) were based on timing.”

Aaron Ochoa, a Financial Advisor with ONB Bank, says that another common mistake people may have made was not paying attention to their asset allocation within their 401(k).

“If someone had set up his allocations at 40 years old and then the meltdown occurred when he was 60, it could completely alter his ability to retire,” Ochoa says.

Another common mistake some make is not seeking out and taking advantage of their employer match for their 401(k). The result is less in total assets – and a shorter distance to fall in the case of an economic downturn, such as the one that has rocked the nation the past several years.

“On the plus side, anyone who had their assets in almost any standard assets class – any index – would be way, way ahead because the stock market is at an all-time high,” Ochoa adds. All asset classes were affected by the 2008 downturn, but most have recovered and are now worth considerably more than before the crash.

“Since 2009-2010, we have had one of the best economies in terms of the stock market of all time,” Ochoa says.

Fear spread by media reports was also a contributing factor, experts agree, scaring and driving many to divest their 401(k)s at a time when their value was down considerably. This has changed some of the most fundamental rules of investment. Generally, the younger the investor the more aggressive investing he can do; while as the investor grows older and approaches retirement, his portfolio and asset allocation should be less risky.

For those who lost money in the downturn and still face retirement, that simple rule won’t have the desired results.

Experts agree there are other retirement options – primarily the Individual Retirement Account (IRA) and the Roth IRA. But IRAs limit tax-advantaged contributions, limiting their aggregate value over time. Meanwhile the Roth IRA, because of its structure, is a good device for younger investors with plenty of time to acquire wealth – and bear risk. Experts still see the 401(k) as best for people not fortunate enough to work with pensioned entities.

Hudgeons thinks the 401(k) is still considerably under-utilized.

“There’s still a smaller percentage of people in 401(k)s than we would like to see because it means people are going to retire without enough money for their retirement,” he says. “Baby Boomers are really jumping on the bandwagon, and they are statistically way behind. It’s going to hurt them. IRAs are really meant for younger people building retirement funds over a long time, to supplement a 401(k) if planned properly.”

With the tremendous limitations on IRAs and simple savings accounts unable to even keep pace with that non-existent inflation touted by the federal government, the 401(k) remains Americans’ best retirement tool – and there are individual 401(k)s unconnected to employment available.

There are also resources available to help people determine what financial devices would work best for individuals. Hudgeons says there is software and websites where people can enter their information and their needs and come up with a “roadmap” to help guide retirement planning.

“I’d still recommend sitting down with a professional to talk about how to put that road map into place,” Hudgeons says.

Comments