Batten Down the Hatches: Securing Your Living Standards During the Financial Storm
In this period of severe financial turmoil, two authors of a new book on retirement offer advice on how households can and should respond to secure their long-term living standards. Scott Burns, a nationally syndicated personal finance columnist and chief investment strategist for the Dallas investment firm AssetBuilder, and Laurence Kotlikoff, a professor of economics at Boston University, offer the following tips for riding out the crisis, based on principles outlined in their book:
- For retirees: Buy TIPs. Households who are retired or close to it and relying on the stock market to finance their retirements should consider moving their funds to inflation-protected long-term Treasury bonds . There is no guarantee the stock market will rebound any time soon, and it could get worse before it gets better.
- Also for retirees: See if Uncle Sam will give you a better deal on Social Security. Retired or soon-to-be-retired households should ensure they are getting the best possible deal from Social Security. This includes considering repaying the Social Security benefits received in the past and reapplying for higher benefits. It also includes deciding when to take Social Security, integrating that decision with the timing of retirement account withdrawals, and deciding which account to tap first.
- For younger workers: Keep investing in your 401(k). Younger workers with money invested in the stock market and relatively secure employment should know this is no time to sell. The market will come back over time. Had you purchased stock the day before the crash in 1929 and held it for several decades, you would have done just fine—indeed, much better than investing in bonds. Stock prices are incredibly low, so this is actually a very good time to contribute more to one’s retirement plans and to allocate those contributions to the purchase of low-cost stock index funds.
- For all, consider paying down your mortgage: Use any regular assets you have to pay down your mortgage. Doing so is a completely safe investment and will most likely save you taxes, as surprising as that sounds. The one caveat here, and it’s a big one, is inflation. Inflation has been running very high, and if that continues, you probably don’t want to pay down your mortgage since inflation will erode the real value of your monthly mortgage payments.
- For workers: Be opportunistic in looking for a better job: Workers without strong job security should be on the lookout for securing, if not raising, their living standard by switching jobs. Even as unemployment rises and hundreds of thousands of jobs are being destroyed, there are also hundreds of thousands of new jobs opening up. In a period of economic turmoil, new and highly advantageous job opportunities may become available. The key message here is not to be discouraged. This is a time to search harder, not sit back and say it’s hopeless. For workers in adversely impacted industries who are finding few alternative job openings and don’t have the skills to switch careers, this may be the time to consider attaining those skills—i.e., it may be the time to consider obtaining a higher degree.
Source: “Spend ‘Til the End—The Revolutionary Guide to Raising Your Living Standard—Today and When You Retire,” by Scott Burns and Laurence Kotlikoff (Simon and Schuster, 2008).
Required Minimum Distributions: A Reprieve for 2009
Retirees who must take required minimum distributions from their qualified plans or IRAs will receive a one-year relief from the requirement in 2009. Under the Worker, Retiree and Employer Recovery Act of 2008, passed in mid-December, required minimum distributionsare suspended for 2009. The new law does not waive RMDs for 2008.
The law was passed to provide relief to retirees who have seen their retirement savings account values severely drop due to the financial turmoil in the markets since September. Existing tax rules would have required even more depletion of these accounts, due to the distribution requirements, at a time when they are at their lowest point.
Required minimum distributions must start by April 1 of the calendar year following the year in which an individual turns 70½; in subsequent years, required minimum distributions must be made by the end of the current year. Required minimum distributions are calculated based on the account’s value at the end the year prior to the year for which the distribution must be made. A 50% excise penalty tax is levied to the extent that the proper amount is not made. The new law waives the excise tax on all 2009 required minimum distribution underpayments.
Source: CCH, a Wolters Kluwer business, is a provider of tax, accounting and audit information, software and services; CCHGroup.com.