Financial Advisor: Assess, Rebalance 401(k) After Tough 2008

By Beacon Staff

A bear market and the recession have taken their toll on retirement plans, leaving many – especially those who are recently retired, hoping to retire or laid off – facing hard decisions.

“There’s a lot of questions right now, what with the Dow down by half,” Beth Morgenstern, an Edward Jones Financial Advisor from Bigfork, said. Last week, Morgenstern hosted two, free 60-minute educational seminars titled “Roll It, Take It, Leave It, Move It: Know Your Employer Retirement Plan Options” for area residents.

The drastic drop in the market has been life altering for many people for whom saving for retirement has meant squirreling away as much as possible through employee-provided plans, the most popular being the 401(k).

Participants at Morgenstern’s events talked about how Wall Street scandals and collapses make it hard to trust their investments. One recently retired man, having watched his retirement savings dip below what he had contributed over his lifetime, said he wished he would have “cashed out a year ago and put everything in CDs.” His pension payment – an increasingly rare benefit – was the one thing “saving our behinds financially,” he said.

Morgenstern, though, warned against trying to play the market: “You’re better off playing the averages than hoping to be in the right place at the right time.” She added that she understands it’s hard to look at statements that are down 25 or 30 percent and still keep perspective, but warned against panicking and pulling money out.

“Don’t take it out when it’s down,” she warned. “Getting in and getting out is very dangerous.”

For those who have recently been laid off or left their jobs, it’s often tempting, Morgenstern said, to take the money out of their 401(k) instead of rolling the assets into a new employer’s plan or an IRA.

They’re young enough, the thinking goes, to make up the savings later. Others are facing financial hardship that takes their focus away from the long term. Many use the proceeds to pay down credit card debt or school loans or to put down money for a home.

“Those things are important, but I’d like to see people do it in another way, rather than using their 401(k),” Morgenstern said. If they’re able to keep making monthly payments, she suggested people continue that instead of raiding the funds.

Before cashing out, people also need to consider how they’re going to pay themselves back that retirement money. What many don’t realize, Morgenstern said, is that emptying a retirement account when you’re young can trigger taxes and penalties, and also imperils your financial future.

For example, if a person under the age of 59 ½ and who is in a 28 percent tax bracket, withdrew $100,000 from their retirement plan they’d pay a 10 percent penalty and $28,000 in taxes, leaving them with $62,000.

“People sometimes get the check in the mail with their name on it, spend it and then at the end of the year are faced with huge taxes,” she said.

In another market-related trend, people often stop putting money into their retirement plan because they’re afraid or discouraged. Morgenstern, however, noted that it’s a good time to pick up stock on strong, long-running companies at a lower price.

Overall, situations are unique for each person, she said, but stressed that everyone needs to consider their options, including their age, their needs versus their wants and their short- and long-term goals, before making a drastic move. In the end, their choices could have serious consequences.

“It’s hard to build that nest egg,” Morgenstern said.

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