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A Fresh Look At Your 401K Allocations
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A May survey by Hewitt Associates noted that despite record losses in 401(k) savings for 2008, individuals stuck with their 401(k) contributions. However, more people dealt with their worry about investment conditions by shifting money into more conservative investments. In addition, a significant number of companies either eliminated or cut back significantly on matching employee 401(k) contributions. Hewitt's annual Universe Benchmarks study, which examines the saving and investment behaviors of more than 2.7 million employees eligible for 401(k) plans, showed that the average 401(k) balance dropped from $79,600 in 2007 to $57,200 at the end of 2008. At least 44% of employees lost 30% or more of their savings. Only 11% of employees were able to break even or see a gain in their 401(k) portfolios. Even still, 74% of employees participated in their 401(k) plans in 2008, about the same as in 2007.
However, the Hewitt survey stated that some workers are reacting to the market downfall by moving 401(k) assets into less risky investment funds to try and blunt their losses. In 2008, 19.6% of investors made trades in their 401(k) plans versus 18.7% in 2007. And the volume of money they transferred in 2008 was much higher. Nine of the 10 most active trading days were the day after a large downturn in the market, or days with an average return of negative 4 %. Employees' average equity exposure dropped to just 59% in 2008—which is an all-time low since Hewitt began tracking it in 1997. Stable-value funds, which are considered less risky investments, experienced an 11% increase in asset allocation in 2008.
That’s why it’s wise for investors to get a fresh start with 401(k) advice as the economy improves. For existing investors or those who have never begun to save or invest for retirement, this is an excellent time to consult both financial advisors and tax experts to make sure both personal and work-related retirement savings complement each other. Clients of Capital Advantage, Inc. are encouraged to review their 401k plan allocations at least annually with their advisor. Did you know certain 401k plans through Fidelity can potentially be actively managed by Capital Advantage, Inc.
Recommendations to keep in mind:
Save even if your company fails to match: This is not the easiest thing to do, but even if your company cuts back on matching, it’s important to try and put additional money into personal retirement investments outside of work. You will still realize the benefit of pre-tax contributions made to your traditional 401(k). And, when you have money automatically taken from your paycheck you are “dollar cost averaging”. That means the fixed dollar amount that comes from your paycheck buys more shares when prices are low, and fewer when prices are high. Thus, your average cost per share can be potentially lower than the average price per share.
Make sure you contribute to a plan: According to 2006 data from the Profit Sharing/401(k) Council of America, more than 22% of eligible workers don’t participate in available 401(k) plans. For the company that are still matching, that’s free money those employees are not receiving.
Continue to save while you wait to join a plan: A significant number of companies don’t let you join the 401(k) until you’ve been working there one year. If that’s the case, get in the habit of putting money away for retirement anyway. Start an individual IRA with the funds you would put in the company plan, or set aside money in a savings account so you can supplement your cash flow and put the maximum amount into your 401(k) once you’re allowed to join.
Contribute the maximum: Not all employees can afford to contribute the maximum allowed by the plan, however it’s important to try or at least contribute the minimum required to receive your company’s match. In 2009, the maximum 401(k) contribution is $16,500, and those ages 50 and older can make an additional catch-up contribution of $5,500 for a total for $22,000. However, for 2010 "if recent inflation patterns continue into September, it's possible there will be a decrease in the statutory limits on qualified retirement-plan contributions and benefits," according to Mercer Consulting.
Don’t let your company do all the work: More companies are automatically enrolling their workers in their 401(k) plans, but some workers fail to take charge afterward. They don’t know how much they’re allowed to contribute and they don’t discuss or review the types of investments they have in relation to their age or retirement plans. It might make sense to bring your investment advisor to review those choices with you.
Avoid poor diversification over time: It’s necessary to do a yearly checkup on all your retirement savings – 401(k) s, individual IRAs and other investments fueling your retirement goals to make sure you’re on track.
Don’t rely on the 401(k) alone: Particularly if matching lags for awhile, 401(k) plans can’t be relied upon as a single source of retirement dollars. You must invest outside your company plans.
Don’t over-invest in company stock: Most financial planners advise that you put no more than 15-20% of your whole 401(k) portfolio in company stock.
Don’t borrow from the 401(k): The Employee Benefit Research Institute reports that employees contribute more to plans that let them borrow. Don’t be fooled. A 401(k) shouldn’t be a house fund or a source of emergency cash. You’re taking money out of the account that otherwise would grow tax-deferred, and if you fail to pay back the money, you could face income taxes and penalties. Instead, build an outside emergency fund of 3-6 months of living expenses you can draw from.
Don’t cash out: Some workers think it’s a great idea to treat a 401(k) as a windfall for when they quit a job. Don’t do it. You’ll pay huge penalties and lose your retirement savings momentum. Instead, establish a roll over IRA account and instruct your former employer to transfer the funds directly to the IRA.
Don’t “lose” your old 401(k) accounts: Maybe you’ve changed jobs several times and never got around to moving older, smaller 401(k) accounts from past employers to current ones or into a self-directed IRA accounts. Always get advice about 401(k) funds when you leave an employer. |
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Reverse Mortgages: What You & Your Parents Should Know Before Applying
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The number of reverse mortgages backed by the government jumped nearly 20% in March and April from the same period in 2008. At a time when seniors have seen their retirement assets depleted by market losses, tapping home equity has been a safety net.
If you or your parents are at least 62 years of age and have significant equity in their home, a reverse mortgage can turn that equity into tax-free cash without forcing them to move or make a monthly payment. If it’s right for them, it’s a worthwhile financial tool. If not, they could make some serious mistakes with their financial future. A reverse mortgage gets its name because of the way it works. Instead of the borrower making payments to the lender, the lender releases equity to the borrower in a number of forms:
• A lump sum cash payment;
• A monthly cash payment;
• A line of credit (which tends to be the most popular option);
• Some combination of the above.
When the owner dies or moves away, the house can be sold, the loan paid off and any leftover equity value can go to the living owner or the designated heirs. Heirs don’t have to sell the house. They can either pay off the reverse mortgage with their own funds or refinance the outstanding loan balance within six months with the option of two 90-day extensions that must be applied for.
There are three basic types of reverse mortgages:
1. Single-purpose reverse mortgages, which are offered by some state and local government agencies and nonprofit organizations;
2. Home Equity Conversion Mortgages (HECMs) are federally insured reversed mortgages backed by the U. S. Department of Housing and Urban Development (HUD);
3. Proprietary reverse mortgages are private loans that are backed by the companies that develop them.
The size of a reverse mortgage is determined by the borrower's age, the interest rate and the home's value. The older a borrower, the more they can borrow, but the amounts are capped by the maximum FHA loan limit for each city and county.
Reverse mortgages have traditionally been chosen by older Americans who can’t cover everyday living expenses or who otherwise need cash for such things as long-term care premiums, home healthcare services, home improvements or to pay off their current mortgage or credit card greater than their income can support. More recently, though, they’ve become popular with individuals who see them as a better alternative to home equity lines. Some use the proceeds to supplement monthly income, buy a car, fund travel and second homes. It’s advised to evaluate your options with the help of your Capital Advantage, Inc. advisor if a reverse mortgage is right for you.
Elderly borrowers will have to consult with their financial advisor before they’re granted this loan – that’s one of the requirements because reverse mortgages can be complex and risky. This step can be completed within the first few days of the process. The basic loan closing now takes place in about 30-40 days from the date of application. Generally the only out-of-pocket cost is an appraisal fee ranging from $300-$500.
Here are other things to consider:
Cost can be substantial: Reverse mortgages are generally more expensive than traditional mortgages in terms of origination fees, closing costs and other charges. The basic FHA-backed HECM loan finances these fees into the initial loan balance, and total cost can range from$15,000 to $20,000. The loans are based on anticipated home value appreciation of 4% a year, so if the housing market is healthy, those costs are generally recovered in a short period of time. But if the housing market sours, it will definitely take longer to recoup those fees.
They’ll need to make sure they’re not endangering their Federal retirement benefits: The basic FHA HECM is designed as tax-free income to the senior receiving their Social Security income. Government entitlement programs such as Social Security and Medicare are not affected by a reverse mortgage. However, a reverse mortgage can affect "means-tested" programs including Medicaid and SSI (Supplemental Security Income) because those programs test to see how much financial resource a homeowner has available. If the total liquid assets exceed allowable limits under federal guidelines, they might endanger their benefits. This is another critical reason to work with a financial adviser on this decision.
Rates can be higher: Reverse mortgages have rates that are typically higher than those charged on conventional mortgages. Interest is charged on the outstanding balance and added to the amount they owe each month. Again, check the total annual loan cost.
Their mortgage can be called: The homeowner or estate always retains title to the home, but if they fail to pay your property taxes, adequately maintain their home, pay their insurance premiums, or change their primary residence, the lender can declare the mortgage due or reduce the amount of monthly cash advances to pay those overdue amounts.
The family needs to talk: If your house or your parents’ house is the only major asset, getting involved in a reverse mortgage may not leave much to the next generation – if it appreciates, there may be some difference that the kids can have. That’s why in addition to discussing a reverse mortgage with their financial advisor, parents and their adult children need to discuss the pros and cons of a reverse mortgage.
Remember, Capital Advantage, Inc. has access to a number of qualified and competent mortgage and reverse mortgage specialist to assist you if needed.
Please call our office at (925) 299-1500 or toll free (888) 299-1500 if you are interested in scheduling a review of your investment strategy and/or financial plan. If you are not a client of Capital Advantage, Inc., we offer free no obligation consultations.
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Thinking Ahead
About Inflation?
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While the struggling economy has put a vice on inflation, many experts don’t expect things to stay that way for much longer. Why? Many economic experts fear the current level of federal spending will inevitably lead to printing more money, and that’s regarded as an inflationary solution.
As of late August, the federal deficit was estimated at $1.58 trillion and expected to increase roughly $1 trillion more based on the final size of President Obama’s healthcare plan. Even if inflation moves slowly, it’s not a bad idea to at least start thinking about some savings, spending and investment strategies that take inflation into account.
Here are a few:
Refinance if it makes sense for you:
In March, April and May of 2009, mortgage rates were at 50-year lows. While they’ve largely bounced around in recent months, an economic recovery may mean rates are headed up. If you need advice on whether refinancing is right for you, consider contacting your Capital Advantage, Inc. advisor who can examine your financial situation and help you determine whether the timing and terms of a refinancing make the most sense. In turn, Capital Advantage, Inc. has access to a number of qualified and competent mortgage professionals to assist you.
Consider laddering CDs & other interest-bearing savings vehicles:
For emergency funds and other forms of savings, a rising rate environment is actually a good thing. “Laddering” means buying CDs, T-bills or other similar investments consistently, so they’ll mature on a consistent basis. Like the steps of a ladder, this process allows a saver to deposit money on a specific date each month – for example, the first of the month – so as each month goes by at hopefully higher interest rates, you can build the nest egg faster.
Consider TIPS:
Treasury Inflation-Protected Securities (TIPS) are Treasury securities whose principal and coupon payments are indexed to inflation based on the movements of the Consumer Price Index (CPI). Like ordinary Treasury securities, TIPS have a fixed coupon interest rate but principal is adjusted to reflect the inflation rate. Although inflation is not a problem today, utilizing TIPS is one of several inflationary investment strategies Capital Advantage, Inc. plans to implement for clients as inflation becomes more obvious.
I-Bonds might be right for you:
Series I Savings Bonds, also issued by the U.S. Treasury, might be worth considering after you see rates finally headed upward. Today, new I-bond rates are 0%. I-bonds are sold through Treasury Direct and Banks with a fixed interest rate, which never change, plus an inflation adjustment. It’s a good idea to buy them when the announced fixed rate is high, because you’ll be guaranteed that fixed return over the life of the bond plus any additional inflation adjustments later. The fixed interest rate at issuance guarantees a minimum return, plus any benefits from future inflation adjustments. Purchases of I-Bonds are limited to $5,000/year per social security number, though in addition to your name, you may be able to buy bonds under the name of your spouse, trust account and your children. Before you start buying, it might be a good idea to talk to your tax professional about the potential impact once you redeem them.
Please call our office at (925) 299-1500 or toll free (888) 299-1500 if you are interested in scheduling a review of your investment strategy and/or financial plan. If you are not a client of Capital Advantage, Inc., we offer free no obligation consultations.
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Contact Us
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John Hayman, CFP
Founder & President
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Donna Zinman
Senior Financial Advisor
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Gary Clarke
Senior Financial Advisor
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Rick McNamara, CFMC
Director of Investments
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Dawnalizabeth Henke
Chief Compliance Officer
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Catherine Norris
Manager of Client Service
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Aimee Schwartze
Director of Client Service
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Amy Montano
Office Manager
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