Photo by: Sanja Gjenero (Stock Exchange)

In a previous post, we introduced 401(k) retirement savings plans. If started early and kept growing with a good rate of contribution from both employee and employer, the 401(k) can be one of the best ways to keep the bills paid after leaving the workforce.

But there’s the catch: the vitality of the 401(k) and its ability to stand up to big post-retirement challenges is built largely on employer contribution matching, where “the boss” chips in a quarter or more for every dollar an employee draws into his or her plan.

What happens when, after years of plugging along on your investment, an employer suddenly withdraws their support for contribution matching? Today, we’ll talk about what to do.

Key 1: You Can Protect Your 401(k) in a Job Switch

Under today’s economic conditions, thinking about switching job for better long-term dividends on your retirement plan definitely sounds like “the nuclear option.” But if you’re already considering a career move, the implications of non-matching over the decades might push you further in that direction. It is possible to protect your 401(k) funds while switching employers, but the process can be complex.

If your new employer has a comparable 401(k) plan, you can transfer your old plan to their new one. Remember that this should be executed as a “trustee-to-trustee transfer”, where the administrator company of your old plan deals directly with the administrator of your new plan. If, at any point in the process, your old plan administrator cuts you a check on the value of your 401(k), you’ll be hit with tax penalties that could reduce the value of your investment substantially; in some cases as much as 50%!

If you are not satisfied with the investment options offered by your new employer’s 401(k) plan, or are not eligible to transfer to the new plan (for example, due to a probationary period as part of your new employment) then you can opt for what’s called a “rollover” IRA. This is a somewhat complicated topic and will be covered in more depth in a future post.

Key 2: You Can “Tough it Out” – With the Right Moves

Jumping ship probably won’t be possible for the majority of workers, even once the boss axes contribution matching. After all, you’ve probably built up a lot of other forms of “equity” in your current place of business; human and professional “capital” that you aren’t eager to put aside. If you must continue on at a workplace where contribution matching has been eliminated, you should diversify your savings and investment strategy.

Your first move should be to evaluate the impact on your long-term savings; an independent financial advisor can help you determine this fairly easily. The second step is to open up other avenues for savings. While you should continue funding a 401(k) even without matching, it’s also wise to consider building up a cash reserve in a separate savings account or other low-risk investment.

The end of contribution matching may signal larger fiscal issues with your employer, and many experts recommend having 3-5 months’ worth of income saved up to protect you credit card debt and other bills in a disaster. This will prevent you from incurring penalties for using 401(k) funds early, and stop high credit card balances from mounting against household expenses if your income is endangered. Once you’re comfortable with the amount of cash you have on hand, increase your 401(k) contribution; to the maximum, if practical. This helps offset the damage from losing contribution matching.

Retirement money
Photo by: Billy Alexander (Stock Exchange)

Every time there’s a dip in the stock market or a big company falls into dire straits, you can hear people fretting about three things: debt, the mortgage, and the value of their 401(k). For many, a 401(k) is a critical part of retirement savings. For others, especially young folk entering the workforce or professionals for whom retirement is a long way away, the 401(k) is something else entirely: a mystery, off in the unforeseeable realm of the future.

But, as with any long-term savings goal, the sooner you start saving for retirement, the sooner you can plan to enjoy it. Since retirement can mean many years of your life – and there’s just no telling what kind of Social Security protections or other government programs will be healthy twenty, thirty, or forty years down the line – it’s important to start thinking about it now. So we begin with an introduction: just what is a 401(k)?

The 401(k) and You

Put simply, a 401(k) is a kind of savings plan that allows you to put money aside for retirement and protect that savings and its interest from taxation until you’re ready to use it. Until a worker reaches the age of 59.5 or is ready to leave company service for retirement, there are serious restrictions on withdrawing any funds from the plan. In practice, this is because companies, through a third-party plan administrator, are engaged in investing the value of employees’ 401(k) plans, and (hopefully) growing them.

Pros of the 401(k)

Though the amount of money an employee can contribute to their plan is capped at a certain percentage of their wages, every dollar you contribute reduces your taxable income and lowers your tax burden. Because no taxes are taken “off the top” of your contributions, your investment can start to accrue more interest sooner. And in many cases, companies will match your contribution on a percentage basis, chipping in a quarter or more for every dollar you add. That is a big deal, and compares favorably to investment opportunities that are taxed before the money starts really working for you.

Cons of the 401(k)

Over three-fourths of companies with 100 or more full-time employees offer a 401(k), but it still may not be the right investment tool for you. Because of stiff penalties against withdrawing from your 401(k), don’t expect to use the earnings to pay bills or reduce credit card balances, even if unforeseen circumstances require emergency spending. Further, and most frightening, 401(k) money can be endangered in a number of ways: if it’s heavily invested in the stock market, for example, it’s subject to the same risk as other non-diversified investments.

Conclusion

Overall, a 401(k) is a very strong long-term investment if backed by a reasonable rate of contribution matching from your employer. Lately, though, many major firms that used to provide strong matching have backed down in an effort to curb expenses. This can have a huge impact on your 401(k)’s earning potential over time, but there are still steps you can take to ensure a healthy fund for retirement. We’ll discuss more in a future post.

South African Krugerrands
Photo By Lyudmila Green

The stock market has been as volatile lately as a poker table at Las Vegas casino. Many traditionally conservative investments have seen unheard of volatility. Savers have begun asking the question, “What can I invest in to make sure I at least keep the principle of my investment?” For many investors, gold has come up on the list of options.

Before buying a boat load of gold, one should consider the reasons gold is valuable and what gold is useful for in terms of investments. Gold has industrial value, but there is frankly plenty of gold that is already mined and available for industrial purposes; so much so that you can easily find 30$ gold plated 2 foot S-Video cables at your local electronics supplier. Gold is useful either to preserve an investment, or as a hedge against falling currency. If you feel currency is unsafe, or your portfolio is overexposed to a specific currency, adding gold to your portfolio could be wise.

A wise investment rule has always been to diversify. Many investors wrongly get the impression that this means buy some tech stocks, as well as some utility stocks. A diverse investment portfolio, however, is not simply having a bunch of stocks; it is having a diverse set of investments. Gold is not a bad thing to add to that basket, which should include not simply stocks, but also real estate, material investments, proper insurances, and other assets that are not exposed to currency risk.

A mistake often made with gold is to treat it as a stock. Indeed, many who hear that gold is a great buy, run out and buy stock in a mining company or two. As mentioned above, there’s already tons of gold that’s already been mined; purchasing a mining company’s stock would really be a bet that either there is going to be a ton of gold mined, or a massive shortage of gold on the market.

So what should a gold saver purchase? Low-premium bullion gold. Bullion is a fancy word for coins, or other forms, of a metal that are only valued by the amount of the metal inside. There are coins that are made with gold that are valuable because they are old, or rare. That is not bullion. A bullion coin is one that you can set on a scale and immediately know its value based on daily spot gold prices. Anyone selling you a stock, or a certificate, isn’t really selling you gold. If you cannot hold it in your hand you’ve been sold a different type of investment.

What does low premium mean? Well, for instance, the US Government sells 1-ounce ‘American Eagle’ coins. These contain an ounce of Gold. The South African government also sells 1 ounce gold coins called krugerrands. American eagle coins contain the same gold as a krugerrand but American Eagles cost more; if you’re just looking to buy gold why pay more?

Bottom line? If you’ve decided that you are worried about a falling dollar, or worried about the risk of ‘traditionally conservative’ investments failing to preserve your investment, its time to buy gold. If you’ve determined to buy gold make sure that you buy gold you can hold in your hand, which is not more expensive because there’s a name on it.

• Can you really Afford it?
• Is it worth the price tag?
• Will the Terms Change?

Can you really Afford it?

Lenders are right now offering very low rates, often for the life of the loan. Still you have to make sure that you can really afford the extra monthly payment in an economy where food prices are still high, and while gas prices are low right now, it may not be the time to buy a Hummer. Inflation is still high and undertaking a large new bill could be taking away from cost of living expenses in years to come. It is important to consider where to put the extra cash if you are fortunate enough to have extra. Low interest rates, and enticing terms may make important purchases more affordable, and tough times for retailers mean lower prices as well. It could be a great time to put on that new addition, upgrade your appliances or buy a new car.

Is it worth the price tag?

A deal isn’t a deal if the product isn’t worth the price tag. There are places to invest in your home where you will always get a return on your investment. Upgrading your kitchen with granite counter tops, new cabinets and stainless steel appliances are always a smart buy, provided you don’t over improve your home for the neighborhood. Research the marketplace on the Internet, or check with a local real estate professional. Spending for a home improvement that will overprice your home for the location is a bad investment. Automobiles are always a bad investment, but for most of us they are a necessity. Compare prices and interest rates. You may be able to get a great deal on a “new” 2008 model, but you must remember that the vehicle is a year older than a “new” 2009 model, so at trade in time it will be worth less, no matter how many miles it has been driven.

Will the Terms Change?

You must also consider the terms on the loan. If it’s an introductory rate, then it is important to consider if you will be able to afford the payments after it changes. You will also want to consider if the lender has provisions to change the terms if you are late on a payment. Always read the fine print, and always make sure you can afford any debt you take on.

Summary

Irresponsibility caused the recent financial crisis. Some of that was irresponsible consumers, some was irresponsible bankers, some was irresponsible government overseers. In bad economic times it is vital to make smart choices with money. Using good judgment is always a smart policy.

What is a Safe Investment?

Some people are of the opinion that with any possibility of loss no investment is safe. Even in that sense though, there’s certainly safer and less safe. Most investors aren’t looking to be billionaires they’re looking to have a normal standard of living in retirement which means making enough money that will continue accumulating throughout retirement to afford that it. That means choosing investments aggressive enough to attain that goal but, especially depending on one’s age, not choosing ones that put your retirement at excessive risk.

Kinds of Risk

To accomplish the above we have to look at the different kinds of risk. Most people worry about what is called market risk; that’s risk that your investment might lose money for a period of time or permanently. While that’s certainly a concern it’s not the only concern, another kind of risk is called inflation risk. That is the risk that no matter what the return on your investment inflation may make the cost of living so much greater that your gains will amount to nothing at all or in fact a lost when compared to the cost of living in retirement,

The True meaning of Diversification

Most investors have heard of the idea of diversification. Essentially don’t put all your eggs in one basket. The problem is a lot of folks don’t really think about what one basket means. A truly diverse investment portfolio should contain both foreign and domestic investments, and those investments should not just be mutual funds but also things like cash, bonds, and potentially even investments such as real estate. Further they should be in diverse industries which are unlikely to experience economic troubles together. The reason behind this is generally if one of these areas is down some of the others are likely up. This reduces the chance for major loses in either category to wipe out one’s savings.

Examples of Safe Investments

There’s a few types on investments which are generally considered safe, even in times of economic strife. Treasury Inflation Protected Securities (TIPS) are issued by the US Treasury, and offer both appreciation as well as protection against inflation. Certificates of Deposit (CDs) are issued by banks but are protected by the FDIC up to 250,000 dollars. Money Market accounts invest in very short term investments, generally ones with very low risk. They are not guaranteed by the Federal Government however they
are usually insured by the SPIC up to 100,000 dollars.

Summary

In general what makes an investment safe is the likely-hood of return on investment. Even with safe investments however one much always diversify. Many regarded municipal bonds as a safe investment before the mortgage crisis. Also, though it’s unlikely, if the US Treasury were to default most of the safe investments backed by it would be in question. For that reason one should always be diverse not only in terms of kinds of risk, but aware of risk in a global market.