After the downgrade: Protect your retirement

Here are 10 tips to preserve your retirement savings and plans now that Standard & Poor's has lowered the credit rating of the U.S.

By MSN Money Partner Aug 8, 2011 11:07AM

This post comes from Janet Novack at partner site Forbes.

 

So Standard & Poor's has downgraded U.S. Treasury debt and Washington is a fiscal and political mess. What does that mean for your retirement? Nothing good, for sure. But you can limit the damage with a calm, yet realistic approach.

 

Here are 10 steps that should help protect your retirement. Post continues after video.

Avoid panic selling. As Forbes columnist Richard Ferri suggests here, don't make hasty moves when the stock market has a bad day -- in reaction to an S&P downgrade or any other news. Instead, take the dog for a walk, see a dumb movie, or go out to dinner and split a bottle of wine. (If you don't have a dog, don't buy one until you read William P. Barrett's report on the $36,846 lifetime cost of his recently departed basset hound.)

 

When calm, review your asset allocation. The idea is to find the mix of stocks and bonds that will maximize your odds of earning a good return while minimizing the risk that you'll require a second bottle of wine to avoid panic selling or that your holdings will have tanked just when you need money. (A longer time horizon generally argues for more money in stocks.) An old rule of thumb is to own your age in bonds. (So at 55, you'd have 55% of your money in bonds and 45% in stocks.) Many financial advisers believe that this simple rule gives too little weight to stocks, particularly considering today's longer life expectancies.

 

Fortunately, there are now some sophisticated Web-based tools that can help you come up with a smart asset allocation (adjusted for your age, assets and risk tolerance); determine whether your retirement plan is realistic; and even pick for you among individual mutual funds. You might have free access to one of these through your 401k.

 

For example, Financial Engines, the product of an independent advice company co-founded by Nobel prize winner Bill Sharpe, is offered to employees from a laundry list of big companies, ranging from Alcoa to Kraft Foods to Xerox. (The Vanguard Group offers Financial Engines free to individual investors with more than $50,000 in Vanguard.)

 

Play tax arbitrage. Review your IRAs and taxable accounts to see if you can at least wring some long-term tax savings out of the market's recent decline. Deborah Jacobs explains here why now might be a good time to do a Roth conversion -- or to undo one you did at the market's peak. William Baldwin describes here how to harvest tax losses from your taxable accounts, without running afoul of the IRS.

 

Maintain -- or increase -- your 401k contributions. Don't curb your contributions (or reduce the amount you're putting into stock funds) just because the market is down. One advantage to investing the same amount each paycheck through a salary reduction plan is that you are cost averaging -- you're buying more shares at lower prices and fewer at higher prices -- thus minimizing the bad effects of market volatility or of poor market timing. (How much money will your 401k provide?)

 

If you stopped contributing to a 401k during the recession because your employer eliminated its match, check the current status of your plan. Many employers are restoring those matches and you don't want to lose out. You can contribute a maximum of $16,500 to a 401k this year, plus an extra $5,500 if you'll 50 or older in 2011.

 

Fund a Roth IRA. If you want to boost retirement savings but are worried about locking up too much money in a 401k in these uncertain times, a Roth IRA is the perfect solution. You can put up to $5,000 a year ($6,000 if you're 50 or older) in after-tax money into a Roth, where it grows tax-free for retirement.

 

The key point here, however, is that you can take out your original contribution (not the earnings) at any time, without penalty. This allows you to stretch and put away more for retirement, without worrying about taxes and that nasty 10% early withdrawal penalty should you need the money sooner. (Warning: married folks with adjusted gross income above $179,000 and singles with AGI above $122,000 aren't eligible to contribute to a Roth if they have retirement plans at work.)

 

Get smart about Social Security. Most retirement planning programs plug in your promised benefits from Social Security under current law -- but also give you the opportunity to fill in a lower number. If you're under 55, shave the number. (It's unlikely we'll see any cuts in starting Social Security benefits for those over 55, but inflation adjustments could well be trimmed for older folks too. In any event, you're just going to have to guess at the changes until warring politicians can come together on a plan to match Social Security's promises and revenues over the long haul.)

 

Regardless of your age, a good way to offset any cuts is to delay claiming Social Security until at least your "normal" Social Security age -- 66 to 67 for baby boomers. More advice on when to take Social Security is here.

 

Plan to work longer. The problem with this advice -- which Forbes and others have been giving for years -- is it's easier said than done. When older workers lose their jobs, they have a hard time finding new ones. Plus, many older workers find their jobs stressful.

 

If you think your job might be at risk or you don't want to stay in your current position until full retirement age, consider transitioning to a second more satisfying (but probably less well-paid) career. It's not easy, or an option for everyone. But it's worth considering. Forbes columnist Kerry Hannon offers advice on second careers and transitions here.

 

Prepare for a "tax increase" in the form of higher Medicare premiums. True, Republicans seem determined to block all tax increases, even for the rich, no matter what S&P says. (A preview of coming tax hikes and fights is here.) But even if the U.S. doesn't reduce its deficit in part through higher taxes, a big if, retirees are likely to face what is in effect a marginal tax rate increase in the form of Medicare premiums that rise with their incomes.

 

For 2011, singles with modified adjusted gross income of greater than $85,000 and couples with income above $170,000 are paying extra income-based premiums for Medicare's Part B, which covers doctors' and outpatient hospital services, and for part D, which covers prescription drugs. At the extreme, couples with income above $428,000 (for 2009) who also take the optional Part D drug coverage will pay an extra $8,203 this year for their Medicare benefits. (More details, here.)

 

The income-based Part B premiums were adopted by Congress in 2003 to help pay the cost of the Bush administration's expansion of Medicare to cover prescription drugs. The extra Medicare Part D premiums were added by President Obama's 2010 health care overhaul to help finance a reduction in the notorious gap (or "doughnut hole") in coverage for seniors with high, but not catastrophic, drug costs. Significantly, last year's health overhaul also froze the $85,000/$170,000 cut-off for high-income Part B premiums at its current level through 2019, whereas previously it had been indexed for inflation. As a result, according to an analysis (.pdf file) by the Kaiser Family Foundation, 14% of all seniors will pay extra income-based premiums in 2019, up from 5% now.

 

And that's 14% before Congress makes any changes to Medicare to reduce the deficit. A plan passed this year by House Republicans would turn all of Medicare (for those under 55) into a system of subsidies to buy private insurance and those subsidies would shrink as income rose. So through taxes, or premiums, affluent seniors will likely pay more. (Consider: While Democrats are determined to keep government-run Medicare, they too have voted for income-based premiums in the past.)

 

Make your adult kids pay rent. There's no question that today's young adults are having a rough go of it, between high student debt and a rotten job market. As a result, the number of adult children living at home has exploded. But you're not doing adult kids a favor if you sacrifice your own retirement security and then have to turn to them later for support. There's some excellent advice here on limiting the financial drain of boomerang kids.

 

Learn to play poker. If all these other saving and investing strategies fail you, learn to play poker and then challenge Barack Obama to a high stakes game. Sorry, I just couldn't resist.

 

More on Forbes and MSN Money:

VIDEO ON MSN MONEY

50Comments
Aug 9, 2011 8:40AM
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I now hear that some congressman wants to cut the govt employees by 15%, and that could save 6 billion in 10 years, I have a suggestion for congress and the senate, how about cutting the number of you bums from both houses, we don't need that many of you either, consider how much we can save without paying your salary and your retirement benifits, now that is cost cutting, but of course they don't want to suffer like the rest of the american people, they just want to waist our money and reap the benifits, bunch of greedy bums, remember election is next year!!!!!!
Aug 8, 2011 1:50PM
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I can remember the days when congress wanted to put all of social security in the stock market, I'm glad that did not fly.

The problem with the 401(k) concept is that by the time the individual investor hears about something and can do much about it, the damage is already done.  All he can do is sit there and watch the day traders make money off of him.  It is sad that a CD is similar is a better investment.

I read these suggestions and between the lines I am reading:  You've been screwed, get used to it.  Expect to work long into retirement - if you can.

I just wish the folks who are causing the the stock market crash (the party of "no") experience some of the pain - but I doubt it.

Aug 8, 2011 2:32PM
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Amazing!!!!  Simply amazing!!!  These jerks are saying, to protect your retirement, give somemore of your hard earned cash to the bulging pockets of Wallstreet. 

 

Not to panic when all you see around you is a fire that is burning everything you've worked for! 

 

Amazing!!

Aug 8, 2011 6:14PM
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so the advice here is to STAY in stocks?  don't forget 401K-IRA rules are set so you'll never actually get ALL your cash out until your ficticious dead-date. 

 

let's not tell people to drop paying 401K-IRA deposits and instead put ALL that money along with your regular house payment INTO your home loan and get a solid 5% return and FASTER payoff of your home. 

 

once a home is PAID FOR you're basically done and can retire more comfortably.  paying off a home faster is simply another retirement account getting paid in full. 

Nothing new here--it's all pablum from the so-called financial advisor/specialists.​ 
Aug 8, 2011 3:23PM
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Are you kidding me??!! Who the heck do they get to "write/report" on this stuff? Plan to work longer and learn to play poker? That's 20% of your advice to people Ms. Novak? Wow, where did you get your financial degree/license, at the back end of a strip mall?

How about a SIMPLE start folks. If you don't have one already, go interview a few COMPETENT financial advisers. Check their backgrounds and references. Listen to them BEFORE making a decision. For people who already have one, call  and make an appointment.

Seems like common sense but I know for a fact that there are droves of people out there who live by MSN advice.

There's my two and half cents today.

Aug 9, 2011 7:48AM
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there should be no cuts in social security,how much money in the past has been taken from the social security and not put back?and if any,the american people should demand it put back!and who is watching over all this money with all the scamming going on,and i get a kick out of these politicians saying social security isnt to live off of its just a safenet,that we should save for retirement,hey news flash idiots,people are losing thier houses and their jobs,barely paying their bills,their is no saving,take the money your wasting in other countries and fix the social security,oh no cant do that all your politician buddies wont get rich off of govt contracts,we need an account of all the social security money that has been takin and it should be replaced if any!!!this is just more bull being shoved down the throats of the american people,fix it thats what you politicians get paid for,do your job or get the hell out!!!!
Aug 8, 2011 1:32PM
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A few month's ago when I shifted all my 401 into the retirement account fidelity sent me an email saying i needed help with my strategy. My rate of return is 0.01 but i didn't lose anything!. who need help now ? . Most of my co workers lost thousands .
Aug 9, 2011 8:40AM
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Some of the recommened actions for your savings/retirement are worn out.  Let me offer some simple advice especailly if 55+ yo:

 

Take your Social Security as early as possible.  Unless you live past 80 years old this will be a good decision.  If you live beyond 80 years, then this decision will go a little negative but not much.  Who knows what the future holds for Social Security so get what you can now.  If you invest the benefit on your own between 55 -70 years old in a safe investment of say 5-7% you will be ahead of the game.

 

Stocks and Bonds:  Forget the 55% in stocks.  Move to a fund that historically pays 5-7% with 65-70% of your liquid assets and then gamble, and yes the stock market is a gamble, with the rest in stocks or some type of balanced fund. 

 

Don't get in and out of bonds or stocks.  Sit back and relax.

 

Simple, effective, low risk

Aug 9, 2011 8:46AM
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This old bushman has no trust in the financial industry and sees that the only people that benefit are the brokers who take there share at the time you invest. Six months or even weeks/days later if your investment tanks, they do not suffer but keep on taking. Now if there was a way to delay their commission or fee such that it was tied to the performance of the investment I might take another look at the stock market..... but really these are the same guys who lied and manipulated and cheated to a degree that bankrupted many an individual and they are giving us tips on how to continue investing in the cesspool they have created.....NotMee.
Aug 9, 2011 8:14AM
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The Government is Gobbelling up Washington Realestate.  Here we have a Government Borrowing at unbelievable heights, clearly needing to downsize, and it is buying realestate by the Billions.  Clearly to put more employees under taxpayer pressure.  "The Donald "  believes government isn't leading.  It's clear the" O "  administration hasn't a clue of how to manage the US Economy.  Growing government employee lists won't raise the economy.  It depresses it.

Aug 9, 2011 8:19AM
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700 hundred billion spent and they cant fix ssi,whats wrong with this picture!!!
Aug 9, 2011 8:00AM
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God knows how the wealthy have gotten richer and the common man struggles to pay their bills...This so called "Tricky down economics" of the GOP does NOT work for the working class of America.
Aug 9, 2011 8:09AM
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Seemingly all of these "fluff" stories are aimed at folks who are still working. Since the banks are charging over 5% to borrow money, which I do not plan to do, and their universal payout is .05%, and the CDs under 1.0% what do people such as I, at 86, do who are only trying to survive as we did during the Great Depression?  We are once again the forgotten, ignored, segment of the population!  Can you say, expendables? Where is the fairness doctrine for us?

Aug 9, 2011 9:01AM
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i have lost money twice in the market,i would go out and eat till french fries came out my ears before i would give any more money to these greedy bastards,enjoy life what little you can because it dont look like its gonna get any better,save what you can at home and dont give it to these greedy people in the market
Aug 9, 2011 8:07AM
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what if the people all pulled their money from the stock market and held it hostage demanding the govt fix all these problems,stop their money wasting in other countries and take that money to fix our problems including ssi
Aug 9, 2011 4:44AM
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Even when things were great the 401K can't provide enough for  retirement!  It's not a good thing unless the employer contributes a great amount!
Aug 8, 2011 4:11PM
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When I saw what the GOP was up to several weeks ago  with the debt ceiling I sold off stocks and became very liquid. Today I buy! 

End the Bush Tax cuts!

Aug 9, 2011 4:33AM
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Retire?

 

ROTFLMAO!!!!!!

 

I don't think that's an option for many American's anymore.

Aug 8, 2011 5:51PM
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Wait to retire? We'll be dead by the time we can retire on what we first invested! We pulled the money OUT. Sitting and waiting to see what happens. 
Aug 9, 2011 1:11AM
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