Experts: Don’t plan entirely on Social Security in retirement
By ROYCE ARMSTRONG
While most 401(k) plans and Individual Retirement Accounts have recovered much of the value lost last year, people are still shell-shocked over how far and how fast their retirement savings evaporated in the face of last year’s economic melt-down. It hasn’t helped that some government seers are now saying that Social Security will soon be bankrupt, and despite the lack of political appetite for the problem, will require a major overhaul.
“If your lifestyle is going to very frugal and low key and without many frills, Social Security may help you,” said Stan Purvis, the director of Horne Wealth Advisors, a division within the CPA firm, Horne LLP. “But, if you are under the age of 50, I would not count on Social Security. In fact, in our work here, we do not even include it in simulations for our clients under age 40.”
From the wreckage of retirement accounts that lost from a quarter to half of their value last year, several trends have developed. The Journal of South Mississippi Business spoke with area experts and identified five trends that may affect how you save for retirement.
1. Seek professional management.
The experts agree that the days of making contributions to a 401(k) plan or IRA and randomly picking the investments are history. The new trend is to get professional help in protecting the account balance and meeting retirement goals.
“Everybody needs to identify the goals that they want to accomplish in retirement and have a professional advisor simulate the wealth accumulation that they are doing and how that would impact their retirement goals,” Purvis said. “That (simulation) is something that they should update every three to five years so that they stay on track to meet their desired retirement goals.”
Rives Pringle, a private banker at Hancock Bank agrees. “I think what most people are doing now is just kind of taking a step back and re-evaluating what they need to do going forward,” Pringle said. “This is just going to be a blip on the radar screen for people that are young. But, for people approaching retirement within the next five to seven years, those are the ones that have really been hit hard by this.”
2. Reducing risk and delaying retirement.
Those individuals close to retirement have realized that they cannot afford the riskier investments any longer and many face working a few years more than they had planned to recover last year’s losses.
“I think that a lot of employers are really taking the risk profile questionnaires and putting a lot more weight on those and making sure that people are actually investing in their retirement plans according to their risk tolerance,” Pringle said. “I think that in the past a lot of people didn’t put a lot of weight on those and were just going out there and picking some mutual funds and not really taking a look at the overall picture. People are focusing on how much risk they can afford to take and how much risk they can really stomach, and then, from there, putting together an asset-allocation that matches that risk.”
“Clients are reducing the amount of risk of that they are taking,” Purvis added. “They are making a decision to delay retirement by three to five years. Clients are also working part-time in retirement because they fear not having enough money now to last them a lifetime.”
3. Finding alternatives to 401(k) plan mutual fund investments.
Most 401(k) plans are invested in various mutual stock funds and mutual bond funds designed to reduce risk and provide a more secure return. These investments have limitations, however. “People are looking at alternatives,” Michael Pasvantis, the president and CEO of Gulf Financial Consultants, Inc., said.
Pasvantis said that he helps his clients diversify into products outside of the normal hustle and bustle of the stock market, including oil and gas, non-traded real estate investment trusts and both fixed and variable annuities. This diversification has protected many of his clients from the severe losses many stocks and mutual funds suffered.
Pringle agrees that investors are considering alternatives, but cautions the investor to study and understand the investment vehicle.
“We have also seen people trending toward some of the variable annuity products,” Pringle said, “and the reason with that is that a lot of those variable annuity companies are able to offer some guarantees that you are not able to get from a typical mutual fund. You will have to pay for those guarantees and they can have some significant costs. A lot of times, in my opinion, the cost of the benefit may not be worth the money that you pay for it. My recommendation to investors is to really study up the variable annuity so that you understand exactly what it is that you are getting into.”
4. Consider in-service distributions from 401(k) plans.
Realizing that people may seek investments other than those allowed within 401(k) plans, some companies are now offering 401(k) plans that allow the employee to roll a portion of the account out into an IRA while the employee is still working. The IRA does generally permit more investment flexibility.
“The trend, in my opinion, is in-service distributions from your 401(k) plan,” Pasvantis said. “A lot of these plans are becoming more and more flexible and will allow you to roll over large portions of your 401(k) while you are still working.”
“Some plans do allow you to roll a portion of your assets out before you actually retire,” Pringle said. “It just depends upon your plan. There is a trend toward doing that. We see a lot of people do that because there are fewer restrictions when you roll your money into an IRA than there are within a 401(k) plan. When your money is in the 401(k) plan, you are limited to whatever investment options are offered inside of that plan. When you roll your money into a traditional IRA, you usually can invest in whatever it is that you choose to invest in, be it individual stocks, mutual funds, annuities, or whatever.”
5. Employees assuming more responsibility for their retirement funds.
All of the experts agree that more and more companies are shifting the responsibility for retirement planning to the employee. “Traditional retirement benefits (pension plans) are frozen or discontinued,” Purvis said. “Many companies are reducing or discontinuing the company match to even those employer-sponsored retirement plans like the 401(k). The companies are doing this so that they can manage their expenses as well as push that responsibility onto the individuals.”
“There has been a trend toward employee-contribution plans,” Pasvantis said. “I have several clients that have complained to me about the company no longer matching their contributions, due to the cutback in the economy and the recession. The companies are cutting back on expenses. They tell me that it is temporary, but I haven’t really heard from any clients that have told me the companies have started matching contributions again.”
Pringle said that as the economy recovers, he expects many companies to resume some matching to employee 401(k)s, but agrees that the employee must assume more responsibility for their accounts.
Finally, there is a cautionary note for exposing a retirement account directly to the stock market.
“Folks that were stock pickers have now realized that most of the time that was not the best strategy,” Purvis said. “They are better off picking a globally diversified investment strategy that is diversified across different equities as well as fixed income in a mutual fund style investment so that they can have an ongoing diversification. Very few people can predict the winners and most individuals are competing against institutional investors who make up 90 percent of the trading volume. So, it is hard for an individual to win that game.”
Royce Armstrong may be reached at rarmstrong@hughes.net or by telephone at (601) 766-9624.