Year End Retirement Funding: The Moment of Truth Approaches
Many of us still have an important personal finance decision to make this year: Whether and how to fully fund our IRA’s and/or 401(k) for 2008. (Mr. ToughMoneyLove has already maxed out our 401(k) funding but re-balancing and non-deductible IRA funding are still decisions in process.)
Actually, 2008 IRA funding can be deferred until you file your 2008 tax return. But either way, a decision must be made very soon and plans made for that funding. This is something I have been thinking about for a number of weeks, because I have a substantial cash-equivalent position in my 401(k) that is poised for use in a re-balancing move. I had planned since last November (my last re-balancing) to execute another re-balancing this month.
So I have considered a Plan B for 2008 year-end retirement funding. Let me explain. Part of our overall retirement plan strategy has been to accumulate sufficient liquid (non-equity) retirement investments that we could use to fund at least three years of retirement living expenses. You could call this our personal “stable value” retirement fund. Having a personal stable value retirement fund is a defensive strategy that would enable us to survive and live through an extended down market without having to sell equity retirement investments that have lost value. Instead, we would hopefully give these equities time to recover and grow. When they do, we re-fund the stable value portion for use in another down cycle. Having that option is so important for retirees, particularly early in retirement.
Since we are still at least 5-10 years from reaching a point where we will have to access any retirement accounts to maintain our standard of living, it made sense to fully accumulate our personal stable value retirement fund later rather than sooner. In other words, up to now we have been focusing on building the non-stable value part of our retirement assets, i.e., equities. Some of our stable value fund is in place now with I-Bonds but more will be needed.
So, my proposed Plan B for year-end 2008 is to reverse the sequence of funding our stable value and equity retirement funds. Instead of using all of the cash-equivalent funds in my 401(k) to re-balance our equity and bond mutual funds, I can use most of that accumulated cash to complete the funding of our personal stable value fund. I have not decided yet exactly what I would purchase inside our 401(k) for that purpose. (I can buy anything inside my 401(k) because I have elected to use a self-directed brokerage account option for managing those funds.) It makes no sense to buy I-Bonds inside a 401(k) because I-Bond interest is tax-deferred anyway. I am sure I can find something suitable.
If I implement Plan B, beginning in January 2009, I would continue regular monthly contributions into my 401(k) and use those monthly contributions to dollar-cost average my way back into the market, re-balancing as I go.
The advantages to using this proposed Plan B for year-end retirement funding are: (a) unlike many other nervous investors, we will not have cut-back or stopped retirement funding altogether; (b) Plan B is consistent with our long-standing retirement strategy – only the funding sequence (personal stable value fund first instead of last) has changed; (c) we avoid putting more money into equities during a time of extreme discomfort with a market that cannot seem to find a bottom; and (d) the re-balancing of equity and bond mutual funds is done on a dollar-cost averaging basis throughout 2009.
The disadvantage of Plan B is that we may end up missing a sale of the century on stocks and mutual funds. Honestly, I think this sale on stocks will last well into 2009 so we will not miss much if any of it when we continue our 2009 401(k) and IRA funding. But I could be wrong and failing to re-balance equities this month could cost us a big upside. Also, periodic re-balancing through 2009 will increase my transaction costs slightly, because of commissions I will have to pay for trades in the brokerage account.
So, Mr. ToughMoneyLove is looking for some feedback on this one. What decisions have you made on your retirement plan funding at year end? How does this Plan B sound to you?