My Retirement Blog

The latest Yahoo Finance article on retirement, courtesy of TheStreet, is one in which they discuss managing two 401(k)s when both members of a marriage are working. The article itself is merely an extension on the discussion of one’s own diversification in a single 401(k) but I think there are some points that it could’ve made but didn’t.

Here are some points it did make that are worth noting:

• Some 401(k)s have better funds for different things. For example, a small cap fund in one 401(k) may have a better expense ratio than the small cap fund in the other 401(k).
• One 401(k) may offer options not available in another fund, such as emerging market funds. This would allow you to have some diversification by way of emerging markets through one 401(k) and then balancing that out in the other 401(k).
• If your total retirement contributions won’t max out both 401(k), max out the one that’s more beneficial to your family. Go for the ones with better employer contributions, better funds, etc.

Some points that it missed:

• Having two funds makes management much easier, you can have one account focus on one asset type (preferably the one with better fees) and then re-balance with the other. For example, put all of the funds in one 401(k) into large cap equities and then use the other 401(k) to go international and emerging markets.
• Two accounts means greater discussion, talking about retirement and money is always a good thing.

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MoneyNing did a fine job on the Carnival of Personal Finance this week and My Retirement Blog was included with our post Retirement fund or emergency fund?

Money magazine has an interesting article about how the recent Fed rate cut language indicated that the Fed was more interested in fighting off a Recession than keeping inflation at bay, which was something it had always had its eye on. When the Fed lowers rates, it does so because it wants to spur growth and it thinks that the growth can be controlled enough that it won’t result in inflation. The Fed started to raise rates the last couple of years because it felt growth was strong and that inflation was a concern, so it increased the borrowing costs and reigned in business growth. It’s a complicated way of saying that when the Fed lowers rates, the risk of inflation goes up and business growth goes up as well. When it lowers rates, risk of inflation goes down and business growth stagnates (in general, specific industries have industry forces at play).

So, the recent rate hike is a concern for retirees because that means the price of goods is likely to go up with inflation. Inflation is the number one concern for anyone on a fixed income, most notably retirees. A recession is also bad but Money magazine makes a great point: “the typical recession has lasted 18 months on average (not including the Great Depression), inflation can dog your finances for a long, long time.”

What can you do?

Position your portfolio so that you can handle inflation as well as capital preservation. By this, they mean that you should be conservative but not too conservative. Treasury bonds don’t yield enough to be worth it, so you’ll want to get into a mix of stocks and bonds to give you a chance against inflation. “Real estate investments, such as REITS or real estate funds, typically perform the best of all types of investments during times of high inflation. But like stocks, they also carry a significant risk of short-term loss.”

It’s tough to know exactly what to do but I think that understanding that the specter of inflation is out there is better than not knowing.

The day after Halloween, the Down drops nearly a four spot on us, over two and a half percent, and we’re left wondering what the heck we should do. I mean, is the credit crunch starting to take effect? Just yesterday the Fed dropped the target interest rate, things were looking pretty good, and today oil spikes and the Dow takes its biggest dip in a while (not a long while, but it’s a big dip and it’s kinda scary). So, what do you do?

If you were well prepared, you should do nothing. If you are five years away from retirement and had 100% exposure to the stock market, this is a wake up call. You have too much in the stock market. If you’re five years out from tapping into your nest egg, you should be at a point where a 2.6% fall isn’t going to bother you too much. Take this as a little warning shot across the bow and balance your portfolio to something that is more fitting someone that close to retirement.

If you’re forty years out, this 2.6% is, if nothing else, an opportunity to put more money in. The Dow just had a 2.6% haircut in one day. It’ll go back, it always will, so you want to be putting a little more money into the market so when it does recover over the course of the next 40 years, you’ll get 2.6% more. If the Dow never recovers, well the last thing you need to worry about is whether your stock portfolio is strong because the economy will be in the tubes.

After years of working, changing jobs, and rolling around 401(k)’s and all the other accounts, it starts to get a little complicated and choatic in terms of getting all the accounts in order. One of the easiest things to do is lose track of your asset diversification because of all the different accounts and it’s one of the dangerous things to do. When all of your retirement money is in one account, it’s easy to calculate the percentage you have in stocks and bonds; when it’s across multiple accounts, it’s much harder. You have to login, record all the funds you might have, check the fund diversification, then calculate the dollar amount in each type, then aggregate all the numbers so you have a total picture. However, just because it’s easy to lose track of it doesn’t excuse it. You really need to keep track of all of your funds because it’s your future at stake.

So, take fifteen minutes today and login to all of your accounts, check that your asset diversification is what it should be. You’ll thank me in however many years later (when you retire!).

Okay, perhaps not you personally but in a recent study by the Employee Benefit Research Institute (EBRI) and the Investment Company Institute (ICI) it was shown that the average employee has approximately 11% of their portfolio in the stock of their employer. This is a fall from 19% back in 1996 but it’s still waaaaay too much to have in any one company, let alone the one that also sends you a paycheck each pay period.

This also doesn’t take into account the fact that plenty of employer 401k programs don’t even offer company stock. For example, my company doesn’t have company stock and so I can’t invest any of my 401k in it; this means that there are lots of folks investing way more than 11% in their own company. The average of those who actually can invest in company stock have 18% to 21% invested. If 11% is way too much, 18% to 21% is certainly way too much.

Don’t put all of your eggs in one basket.

My retirement is broken up into four accounts, the first is a SEP-IRA, the second is a Roth IRA, the third is a Rollover IRA (traditional IRA whose originated funds came from a former 401k), and a 401k. Within the four, I’m basically in a mix of mutual funds with the exception of the Roth IRA, which is half in a Target Retirement and half in individual stocks for me to play with. So, given the turbulent market and the fears of the subprime meltdown, and the after effects, do you know what I’ll be doing with my asset allocation?

Nothing. Yep, I’m doing nothing. This is the from the guy who liquidated his Target Retirement 2050 position a few weeks ago because of how the market looked. I still stand by that decision and I conceded that I sold the 2050 because I didn’t have a good plan and, when I figured out the plan, I realized I shouldn’t have been in 2050 in the first place.

So why the apparent reversal? It’s not truly a reversal, I have a clear cut plan with my retirement assets, in part because of legal mandates, and in the long term stocks will recover whatever minor blips there could possibly be, which this will be. Even if you think the financial markets will recess, as you must have expected after the dot-com bubble, they will eventually correct themselves and in the long term you will be perfectly okay.

The recent stock market peaks and valleys have probably given your heart a bit of workout lately huh? This is probably especially true, the heart workout part that is, if you’re close to retirement and underscores the reason why you should try to shift your investments to less volatile vehicles as you get closer to when you’ll start needing the money. If the volatility is worrying you and you’re about the retire, use it as a wake-up call that you should adjust your allocations.

Are you concerned you’re going to get too conservative? There’s some great actionable advice from CFP Steven Kaye. First, consider your risk tolerance and then use that to figure out how much of your retirement fund you’ll want in equity (stocks) and how much you’ll want in income producing vehicles. Here is what you should do based on your risk profile:

For his clients with an aggressive risk tolerance, he makes sure they have five years’ worth of cash flow in fixed income. For clients with a moderate risk tolerance, he sets aside eight years’ worth. And for the conservative, he makes it 10, more if they’re ultra-conservative.

I’ve been reading Ask Carrie, a blog over at Charles Schwab, and there was a recent post that caught my eye where a reader was concerned about geopolitical events such as the continued Iraq war, Iran troubles, and North Korean issues; and how they could adjust their portfolio or adjust their retirement planning to help mitigate these risks.

In short, Carrier recommends that you do nothing if you are already following a prudent investing strategy of diversification and risk mitigation in the first place. If you look towards history and see what has happened in the past and how the markets have responded, you’ll see that “The value of the financial assets goes up, dips in response to destabilizing events, and then continues to rise.”

There’s no sense in worrying about the things you can’t control such as what’s going to happen with Iran because you can’t control them. Just try to control the things you can such as a saving a proper amount, diversifying your assets, and being smart with your money - those things will get you farther than tweaking your investments in response to those macroeconomic issues.

I was surprised to read in a recent article from the Motley Fool that the the actual appreciation rate of residential real estate over a long period of time, in their study they looked at two time periods, barely beat Treasury bonds in one case and lost to T-bills in the second case. In the period from 1963 to 2005, residential real estate returned 1.73% (inflation adjusted) compared to Treasury bills returning 1.44% over that period, stocks returned 5.84% and bonds returned 3.18% over that same period. They also looked at any ten year period over that time and saw that appreciation reach 1.62% compared to 6.47% from stocks.

Read the article if you’re a numbers type of person but the article really does illustrate something most of us probably wouldn’t have thought of on our own, that residential real estate was out performed by bonds and barely beat Treasury bills (it’s almost a given that stocks outperform real estate).

So, what does that mean for your retirement? If you don’t have a 401K or any other retirement assets and were hoping to lean on the appreciation of your house, that may not be the best strategy because you would do better to take that money and put it in an index fund.

Source: Yahoo Finance

Many people have believed that cash, as an investment, is safe but it isn’t and it’s the subject of Walter Updegrave’s latest column in which he explains why cash (”invested” in traditionally safe vehicles) is risky. While Updegrave focuses on the opportunity cost aspect of it, how the money can be earning higher returns elsewhere, such as in a 401K; I think that doesn’t do as well of job explaining the entire story - there are a couple reasons why cash is risky.

Exchange Rates
The value of a dollar, on the international markets, fluctuates every single business day and lately, it’s been at record lows compared to other currencies. You may know that all the money that hold, those are dollars and as each day passes there is a risk that your dollar is going to be worth less and less (or more and more) each day depending on the demand in the world markets. Usually this won’t affect you since everyone around you accepts dollars, so you won’t need to exchange them, but as anyone who does a fair bit of traveling knows, exchange rates can mean the difference between cheap and expensive vacations. So, when you keep your money in a money market, and perhaps too much of it, you’re not diversifying on the basis of country risk - which is risky.

Inflation
By now everyone is familiar with inflation, it’s like an exchange rate but for time. As time passes, your dollars are worth less and less. A hundred bucks in 1970 is worth $521.69 today (2007)… a hundred bucks in 1913 is worth a cool $2,044.61 today! Unless you invested correctly (i.e. earned a rate of return higher than inflation), your $100 in 1913 would be worth only $100 today.