Read The Aftershock Investor: A Crash Course in Staying Afloat in a Sinking Economy Online
Authors: David Wiedemer,Robert A. Wiedemer,Cindy S. Spitzer
We should also emphasize that for younger employees who haven’t yet opened a 401(k)—assuming there is a significant employer matching contribution—it can still be worth doing so
even if you’ll have to take the penalty to get out
in a few years. Remember, that matching contribution is essentially free money, and if you’re sticking with cash-based investments like money markets and short-term Treasurys, even a 25 percent return (let alone a 50 or 100 percent return) is still a very impressive gain, especially in these slow economic times.
One note for readers in other employment categories: This advice also applies if you have a 403(b) plan, which carries the same rules and penalties for early withdrawals. If you have a 457 plan, you have an added advantage—you can still withdraw funds early without the added 10 percent penalty, though you’ll still owe ordinary income tax on all withdrawals. Similarly, people with Keogh plans, SIMPLE IRAs, and SEP IRAs should follow the same advice—invest in Aftershock-safe assets. But the great advantage of self-employment is that you get to make the choices yourself.
One of the great features of IRAs—both traditional and Roth—is the
rollover
function. If you have a 401(k)—or 403(b) or 457, for that matter—and are leaving your employer, whether it’s due to a job change or involuntary termination, you can transfer your 401(k) funds into a self-directed IRA account without paying taxes or penalties. This gives you far more investment options than a typical retirement plan, letting you put the funds in Aftershock holdings.
This is also a great option for those who are entering retirement. You can take your withdrawal in a single lump sum and roll it into an IRA, invest the funds as you wish, and continue to enjoy the tax advantages for the life of the account.
Here’s another nice option: The total contribution you can make into your IRA is capped each year, but there’s no limit to the number of IRA accounts you can have. You can put some funds into a gold IRA and another portion into a discount brokerage account, and still another portion into a full-service brokerage account (you just can’t go over the maximum total for the year). The only potential drawback to this is that your broker may charge fees for transfers and for setting up new accounts. But if you have substantial retirement funds and you want to diversify, IRA accounts provide a great vehicle for that.
Because the federal government guarantees the retirement plans for its workers, those plans will hold their dollar value—though not necessarily an inflation-adjusted value—until the government defaults, which won’t happen until we are well into the Aftershock. The downside is that retired federal workers could face serious problems before that. After all, once inflation kicks in, it will eat away much of the value of their monthly payments.
The biggest problem with the defined benefit plan for federal workers is that they don’t allow you to take lump-sum payments. Instead, the government makes distributions on an annuitized basis, which means that you can’t depend on these plans over the long term. Fortunately, as we discussed in the defined benefit section, if these plans run into problems, federal-service pensioners will be at the front of the line when the government makes hardship payments.
For federal employees who take part in the Thrift Savings Plan—which effectively functions like a 401(k)—you can take a lump-sum withdrawal when you retire, or a one-time, age-based withdrawal if you are older than 59½. That gives you some measure of control and lets you pick Aftershock assets. But if you’re younger than that and still working for the government, you’re out of luck. The TSP doesn’t allow early withdrawals for current employees. Even if you were willing to pay the 10 percent penalty, you can’t do it. This puts younger federal employees in a bind—they may have to consider changing jobs over the next few years or risk a significant loss down the road in the retirement savings they’ve already accrued. (Again, if you’re involuntarily separatedfrom your job, this could be a silver lining.)
| Question : | Should I use a retirement calculator to see if I’m on the right track? |
| Answer : | Retirement calculators can be valuable tools, but they won’t be accurate unless they include Aftershock assumptions, and we don’t know of any that currently do. In fact, while calculators are a way to gauge your progress, it’s more important to get the fundamentals right and invest properly in an Aftershock-based portfolio. |
| Question : | How much should I contribute to my 401(k) in the meantime? |
| Answer : | As long as your employer matches your contributions, putting in the minimum amount to get the employer match gives you a guaranteed return—free money—which is a big advantage. However, if you normally contribute beyond the minimum matching amount, you’re better offer putting that excess into an IRA or other account, so you don’t have to worry about penalties for withdrawal later. |
| Question : | When should I cash out my 401(k) and take the penalty? |
| Answer : | This situation needs to be monitored very carefully, but depending on how things progress we think you’ll need to pull your money out in the next two to four years. As we’ve written earlier, the first sign will be inflation going above 5 percent and, as it rises further, global investors starting to move away from the dollar. It’s important that you watch for these signs and be prepared to get out quickly. But remember: It’s better to be out too early than too late. |
| Question : | Should I take Social Security benefits early? |
| Answer : | Yes. In the past, it was best to wait. But, as we’ve explained, Social Security will eventually be means-tested, so it’s best to take what you can while you can. Even if you qualify for means-tested payments down the road, you’ll almost certainly get more money by taking payments as soon as you can. |
| Question : | What about my home equity? Won’t that help me get through retirement? |
| Answer : | Historically, home equity has been a major part of people’s savings, especially in the United States. Some middle-class American families have up to 90 percent of their savings tied up in their homes, and many people rely on home equity during retirement. |
| If you’ve read Chapter 6 on real estate, you already know the problem with this approach. Home equity is not going to count for much when interest rates rise and the real estate market crashes. Refinancing will become virtually impossible, and the interest rates will be staggering enough to scare away most homeowners—limiting their ability to pull money out of the equity they’ve built up. Already, since 2008, American homeowners have lost 55 percent of their home equity. That doesn’t mean their homes have lost 55 percent of their value, but any time you owe money on a property, a fall in the value of that property has a compounding effect on your equity. Even those few who own their homes outright, while they may be in a better position than most, won’t find much help from it in covering retirement expenses. Clearly, home equity isn’t going to save many people. | |
| Question : | So then I shouldn’t consider a reverse mortgage? |
| Answer : | As explained in Chapter 6, a reverse mortgage is a losing proposition. It puts you on the line for significant debt while still having a lien on a house that—very likely, in most markets—has lost much of its value. |
One of the myths about retirement is that you spend less money than during working years. In fact, your spending often goes up. First of all, retirees have much more leisure time, and it takes money to fill up that time with travel and activities, things that many people consider necessary for a
good
retirement. Then there’s the cost of inflation. This isn’t an actual increase in expenditures, but for retirees who depend on a fixed income, it can be problematic when things cost more. And it’s not going to get any better when the dollar bubble bursts.
The good news is that if you’re still working, you have time to save aggressively and invest intelligently. This means diversifying funds, and moving assets into Aftershock-safe investments in the next few years. But most of all it means
active management
. What works today may be poison tomorrow.
For those who are ready to retire soon and enjoy their pension, or perhaps are already on a pension, the Aftershock couldn’t come at a worse time. But that doesn’t mean you can’t protect yourself now, while you still have some time. In fact, if you invest well, you can re-orient your portfolio to limit your downside risks during the Aftershock and even come out ahead (see Chapter 11). Well-placed investments now can save you from a lot of diffi culty down the road
For hundreds of years, estate planning was simple. You created a will that stipulated how your assets were to be distributed after you died. But things became much more complicated in the early twentieth century, when income taxes and estate taxes were first introduced. These extra costs motivated people to plan their estates in ways that helped them avoid taxes and the increasing cost of probate.
If you don’t leave a will, your local probate court distributes your assets according to “intestacy” laws, which vary from country to country and state to state. Typically, this means equal distribution among heirs with no personal control over who gets what. For example, you might want one of your children in particular to inherit your wedding ring, or you might want to leave a certain amount to charity. Without a will, intestate distribution doesn’t allow that.
Today, even if you have a will, your heirs have to go through probate to implement its provisions. Probate can be an ugly process—it often results in long delays before a will can be executed, along with legal fees that can eat away much of an estate. If a judge ends up appointing an executor and attorney for the will, some of those professionals will try to wring as much money out of the estate as possible. It’s well worth your efforts to avoid a complicated probate situation.
If you have limited assets, you can accomplish much of this through a process known as “titling.” In practice, titling simply means establishing control and ownership over something. For example, you can hold a bank account jointly with a spouse or another heir, stipulating a right of survivorship. That way, if you die, your spouse simply takes over the account outright, and it doesn’t become part of the estate. Life insurance is another example—if you specify a beneficiary, that becomes a simple transaction when you die: The insurance company pays the beneficiary directly. If you’re planning to distribute assets this way, it’s critical to keep your records up to date. If you’ve remarried or had a new child, out-of-date documents could lead to problems.
Titling assets appropriately works well and removes the potential for disputes, but it has limited application. If you have complex inheritance situations, you can’t handle them through titling alone. Another, more powerful method is to use a revocable living, or inter vivos, trust. You put the assets you want to distribute into a trust, and you control it during your life. Once you die, the trust is controlled by the trustee or by the successor of the trustee to continue to protect or to distribute the assets according to your instructions. It’s an effective way to distribute assets and avoid probate. You can keep the entire inheritance process private. The process of creating a living trust usually requires an attorney, though some people do it themselves.