By Janet Novack
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.
1. Avoid panic selling.
As Forbes columnist Richard Ferri suggests here <http://blogs.forbes.com/rickferri/2011/08/04/how-to-escape-from-a-bear/?partner=worldnow>, 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 your read William P. Barrett's report <http://blogs.forbes.com/williampbarrett/2011/07/29/my-dogs-life-cost-36846-24-what-about-value/?partner=worldnow> on the $36,846 lifetime cost of his recently departed basset hound.)
2. 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 401(k). 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 <http://finapps.forbes.com/finapps/jsp/finance/compinfo/CIAtAGlance.jsp?tkr=aa&tab=searchtabquotesdark?partner=worldnow> to Kraft Foods <http://finapps.forbes.com/finapps/jsp/finance/compinfo/CIAtAGlance.jsp?tkr=kft&tab=searchtabquotesdark?partner=worldnow> to Xerox <http://finapps.forbes.com/finapps/jsp/finance/compinfo/CIAtAGlance.jsp?tkr=xrx&tab=searchtabquotesdark?partner=worldnow>. (The Vanguard Group offer Financial Engines free to individual investors with more than $50,000 in Vanguard <https://personal.vanguard.com/us/insights/retirement/financial-engines?partner=worldnow>.)
3. 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 <http://blogs.forbes.com/deborahljacobs/2011/08/05/ira-roth-recession/?partner=worldnow> 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 <http://blogs.forbes.com/baldwin/2011/08/04/tax-benefits-for-market-crash-victims/?partner=worldnow> how to harvest tax losses from your taxable accounts, without running afoul of the IRS.
4. Maintain --or increase -- your 401(k) contributions.
Don't curb your contributions (or reduce your 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. If you stopped contributing to a 401(k) 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 401(k) this year, plus an extra $5,500 if you'll 50 or older in 2011.
10 Steps To Boost Your 401(k) Balance <http://www.forbes.com/pictures/mjh45kli/grab-your-employer-match-2?partner=worldnow> <http://www.forbes.com/pictures/mjh45kli/grab-your-employer-match-2?partner=worldnow>
5. Fund a Roth IRA.
If you want to boost retirement savings but are worried about locking up too much money in a 401(k) 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 to put away more for retirement, without worrying about taxes and that nasty 10% early withdrawal penalty should you need to tap into the money before retirement. (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.)
10 Ways To Tap Retirement Cash Early <http://www.forbes.com/2009/04/04/ira-401k-hardship-personal-finance-retirement-ten-percent-penalty_slide.html?partner=worldnow>
6. 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 Congress can come together on a long term plan to match Social Security's promises and revenues over the long term. ) Regardless of your age, a good way to offset any cuts it 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 <http://blogs.forbes.com/janetnovack/2011/02/15/the-big-decision-when-to-take-social-security/?partner=worldnow>.
7. 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.
8. 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 <http://blogs.forbes.com/janetnovack/2011/08/02/higher-taxes-and-epic-tax-fight-are-on-the-horizon/?partner=worldnow>.) But even if the U.S. doesn't close its deficit with 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), if they take the optional Part D drug coverage, will pay an extra $8,203 this year for their Medicare benefits. (More details, here <http://blogs.forbes.com/janetnovack/2010/11/04/higher-income-seniors-hit-with-medicare-doctor-and-drug-premium-hikes-for-2011/?partner=worldnow>.)
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 <http://www.kff.org/medicare/upload/8126.pdf?partner=worldnow> 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% of seniors paying income based premiums before Congress sets about to reducing the deficit. A plan passed this year by House Republicans <http://blogs.forbes.com/janetnovack/2011/04/05/paul-ryans-deficit-cutting-plan-and-your-delayed-retirement/?partner=worldnow> 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.)
9. 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 <http://blogs.forbes.com/janetnovack/2011/06/14/obamas-student-loans-paid-off-will-yours/?partner=worldnow> 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 <http://blogs.forbes.com/financialfinesse/2011/08/04/retirement-is-blocked-by-the-revolving-door/?partner=worldnow> on limiting the financial drain of boomerang kids.
10. 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.