You may think you’ve saved enough money to last through your retirement, but any number of life’s curveballs can cause you to rethink how your retirement savings are invested and whether they are really working to your advantage.
Here are just a few scenarios that may require you to make some major changes to how your retirement nest egg is invested:
- Unexpected medical expenses in the form of co-insurance, premium deductibles, and non-covered services could put serious dings in your typical budgeting plans
- Serious economic downturns like the one in 2008, which saw average retirement accounts lose 25 percent of their value (1) could be life-altering, especially for those with marginal savings
- 401(k) or IRA retirement plans that are either unbalanced or otherwise delivering poor returns
- Inflation pressures that were offset by cost-of-living adjustments while you were working but are now causing serious reductions in purchasing power that you will need to compensate for
What now? What can you do to seek to ensure that you have enough money to last through retirement? We suggest you consider exploring reinvestment options and meeting with a professional wealth advisor.
As mentioned above, inflationary pressures could impact your retirement savings significantly.
1. Dividend reinvestment
One way to potentially help offset this loss in purchasing power is to consider dividend reinvestment. Dividend reinvestment may provide long-term benefits if you have other sources of short-term income. It works by using dividend distributions from stocks, mutual funds, or exchange-traded funds to purchase additional shares.
You probably won’t see huge dividends from most investment plans, but over time, you could increase your holdings.
2. Treasury Inflation-Protected Securities
Treasury Inflation-Protected Securities, or TIPS, are an investment option that helps eliminate inflation risk. The principal of a TIPS increases with inflation and decreases with deflation, as measured by the Consumer Price Index. so when a TIPS matures you are paid the adjusted principal or original principal, whichever is greater.
TIPS pay interest twice a year at a fixed rate. The rate is applied to the adjusted principal so, like the principal, interest payments rise with inflation and fall with deflation.
TIPS are issued in terms of 5, 10, and 30 years, and the investment increments are in multiples of $100.
TIPS are subject to market risk and significant interest rate risk as their longer duration makes them more sensitive to price declines associated with higher interest rates.
3. 401(k) distribution options
When it comes to 401(k), there are four main options:
- Leave the money in your employer’s plan, if permitted
- Roll over the assets to your new employer’s plan, if one is available and rollovers are permitted
- Roll over to an IRA
- Cash out the account value
There are a lot of people who choose the option of leaving their 401(k) with their former employer’s plan when they retire. The problem with that is your investment choices are limited to the plan offerings, which may be poor performers.
Alternatively, you could also choose among many different investment vehicles if you roll over your funds into another plan. You could roll over your retirement savings into another 401(k), a traditional IRA, or a Roth IRA of your choice, which may provide you with much more control over how and where you invest your money.
Another benefit of doing a rollover is that you avoid the mandatory federal tax withholding penalty that you would incur if you chose to take distribution funds prior to age 59.5.
Meet with a professional wealth advisor
Investment and tax regulations can be complicated. It may be a good idea to seek the help of a wealth advisor who has broad knowledge of money management strategies.
These individuals can potentially save you time and money by managing your portfolio for you. Try to find a certified advisor who is willing to act as your fiduciary. They are obliged to work in their clients’ best interests, not their own.
To request a consultation with a financial consultant at TDECU Wealth Advisors, call 877-635-7028 or fill out this online form.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All investing involves risk, including possible loss of principal. Stock and mutual fund investing involves risk including loss of principal. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price. An investment in Exchange Traded Funds (ETF), structured as a mutual fund or unit investment trust, involves the risk of losing money and should be considered as part of an overall program, not a complete investment program. An investment in ETFs involves additional risks such as not diversified, price volatility, competitive industry pressure, international political and economic developments, possible trading halts, and index tracking errors. The payment of dividends is not guaranteed. Companies may reduce or eliminate the payment of dividends at any given time. Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax. The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.