Year End Retirement Funding: The Moment of Truth Approaches

November 18, 2008 by  
Filed under Investing, Retirement Planning

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.

The problem is that the market is still trending downward and has not yet found a bottom.  Who really wants to invest in equities under these circumstances?  Yes, stocks are on sale but we all would prefer to put money in during the “meat” of a market move once a trend of relative directional stability has ben established.  (I borrowed that “meat of the market move” phrase from a recent article by Professor Peter Navarro.)  I am not talking about timing the market but finding some degree of confidence that general upward movement is in our foreseeable future.  These are unique times and I wonder if anyone has reached that confidence point yet.  I know I haven’t.  Neither has Professor Navarro.

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?


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5 Responses to “Year End Retirement Funding: The Moment of Truth Approaches”
  1. mike says:

    I would personally continue to buy equities and not worry about the personal value fund until you’re closer to retirement. Or I guess to put it another way, you should continue to invest today as if you’re going to retire in 5-10 rather than creating now the portfolio you want to have when you retire. If you’re worried about equities being too risky then you could also supplement your portfolio with international stocks, REITS, commodities, foreign currency, oil + gas, etc. The more of everything you have the less risky it becomes.

    I would also say that don’t forget to diversify your account types. Do most of your investing inside your 401K where taxable investments (bonds, div producing stocks) receive the most benefit, but also keep some stocks(preferably ETF’s) in a self titled brokerage account and don’t touch it. That way you’re not really being taxed on anything. When you retire in 10 years then those stocks in the personal account could be sold (paying taxes once, long term capital gain rate) and converted into your stable value fund. You’ll also still have a good diversified portfolio inside the 401K.

    As for the “meat” of the market. I hate to say it but if the best “technical” stock analysts can’t tell when the market bottoms, us as laymen have no prayer that we’ll know either. So that means you can either invest no matter and don’t worry about that day’s prices or you can pick an indicator you like or are comfortable with and follow it consistently. I personally like moving averages that show when a market has “bottomed” but other very intelligent people will disagree with me.

  2. Mike – Thanks for your thoughtful comments. Our portfolion in the 401(k) is well diversified (I use the Scott Burns 10-speed portfolio) but desperately needs re-balancing.) I agree that finding the market bottom is all but impossible and that is why I hesitate to implement the Plan B I discussed. I also own stocks in taxable accounts but actually bought them primarily based on dividend yields. Lots to think about over the next month.

  3. Penny Price says:

    Hello Mister,

    I was attracted to your article because I face a similar-yet-different conundrum. I have NO 401k options at work, and neither does my Fiance BUT I have gotten us both to save $5k to open our very first RothIRA’s. I thought that might happen this year, but now I am not sure if the money is better off in a high-yield/liquid online savings account, or if I should go ahead and fully fund a new targeted retirement account via Vanguard or something just before I file my ’08 taxes. Can you help offer me/us any advice?

    ~Penny

  4. Penny: Thanks for the visit and comment. Key question before I can respond to yours: how old are you and your fiance?

  5. Penny Price says:

    Good Morning Mister,

    I am 26, and my Fiance just turned 30. We are DINKS right now, and I managed to pay off the second mortgage on my home a year ago (purchased 4 years ago…don’t even ask what it would appraise for “today”!)—and I also have an emergency fund covering about 6 months. Neither of us has any credit card or car debt anymore—just the house. But part of me wonders if I would be better off getting the “guaranteed” return of paying down the mortgage versus playing with stocks and stuff (a corner of the world that sorta frightens me :)).

    Thank you again for any help you can offer!

    ~Penny

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