How will the collapse of Lehman (Stock Quote: LEH), along with Bank of America (Stock Quote: BAC) scooping up Merrill (Stock Quote: MER), and whatever else Wall Street affect retirement plans?
It depends, experts say, on how close an employee is to retirement but in general, “people should use this time to check their asset allocations,” says Daniel R. Solin, author of The Smartest 401K Book You’ll Ever Read. And don’t sell, he adds.
“History shows us that the market can recover from tragedies,” Solin says. Whether or not this situation will be different is unpredictable but, “the market has recovered events that have been far worse.”
And for those fretting about their future, specifically, retirement plans, William Wheeler, a financial advisor, says raiding a 401(k) plan is an absolute last resort for most employees.
“I’m a big proponent of 401(k) plans,” he says. “It’s the greatest retirement vehicle right now and with the market the way it is right now, I’d say ‘keep putting money in.’”
Take a look at how employees of different ages should treat their retirement funds amongst the Wall Street turmoil.
Young Workers (18-24)
Take a deep breath, and know that your time horizon is long. Translation: You have a chance to regain financial losses. A young employee is more likely to face unemployment in this whole situation than a loss caused by stocks, says Rob S. Seltzer, a CPA from St. George. “They won’t lose a lot because most of them haven’t put away much,” he says. And as for retirement, people in their 20s should begin investing in a 401(k) as soon as they can, especially if their employer is willing to match their contributions. If a young employee is let go or resigns, they have three choices regarding their 401(k) plans, says Seltzer. The first is to spend it, the second is subsequent rollover, and the third is IRA rollover. “The second two options are better, and the third is the best,” says Seltzer. IRA rollover has a lower cost and more investment options, he adds. When you’re younger, your focus should be on your asset allocation, and Solin suggests that with a close to 40 year horizon, 80-100% of your investments should be in stocks.
Mature Worker (35-50)
Reminding yourself that a 401(k) plan is a long term investment is key, says Wheeler. “Even at 45, you have 15 years until you can even touch the money [in your 401(k)] without being taxed,” he says. Also, retirement is being postponed by many, which is all the more reason a mid-career employee should leave their 401(k) alone. “Why make a decision based on today’s volatility?” says Seltzer. Withdrawing from a 401(k) before the age of 59 ½ would result in an increase in federal income and state income taxes.
On-the-Cusp Retirees, and Golden Yearlings
“You may have had plans to get that gold watch and apply for country club membership,” says Wheeler. “But you’ll have to scratch out the watch and settle for a gym membership.” Retirement may be postponed, and the vision of what it could have been should be adjusted if you were affected by the losses on Wall Street. But this type of loss is likely to have occurred in a situation where a person invested too heavily in company stock. “The Bear Sterns debacle should have taught us this,” Wheeler says. “It’s not a good idea to put too much money into company stock.” Even if retirement is five years away, experts say raiding your 401(k) should still be a last resort. The real key is having a balanced portfolio before a financial crisis hits, says Seltzer. But if back-ups fail, before a close-to-retired employee touches their 401(k), they should determine the areas in their life where they still have a sense of financial control. “If you’re locked in by alimony, a car lease or a mortgage, you’ll have to change your discretionary spending by adjusting your budget,” Seltzer says.
“If they’re in their 50s or 60s, they may have to sell everything and stay liquid,” says Solin. “If they have other assets, though, they should adjust asset allocation, get rid of company stock, and rebalance their portfolio.”