If you are a near retiree in this condition, an important first step is to assess your current financial situation. Having a good sense of where you are starting may assist you in determining what measures you need to take to achieve the retirement you desire. Figuring your debt-to-income ratio – the relationship between your expenses and the amount of money coming in – can be a useful place to start. To calculate your DTI ratio, add up all of your regular monthly debt commitments and divide this sum by your gross monthly income – the lower the result, the better.

Once you have a grasp on your current financial standing, determine how much money you will need to save to have the lifestyle you desire in retirement. As per the EBRI, less than half of workers have reported efforts to calculate the funds necessary for their retirement (http://tinyurl.com/42j8l2l). Neglecting to perform this self-evaluation can have dire consequences. Helpful tools for making this assessment can be found online like this Retirement Savings Calculator (http://tinyurl.com/yl63wcs). While predicting your needs, be sure to consider potential unexpected expenses in your estimation, as unforeseen events like medical emergencies can quickly deplete saved funds.

After establishing where you are on the path to retirement and where you would like to go, it is time to develop a plan to get there. One theoretically simple way to begin is to reduce expenses by paying off large debts that incur high interest. The money saved in interest can be put toward other expenses down the road, rather than consume retirement income.

There are also some useful methods that can be utilized through your current employment. If your employer allows for your directly deposited paycheck to be split among multiple accounts, it can be advantageous to dedicate a certain percentage to be automatically deposited into a savings account. This removes the need for conscious discipline to transfer the money yourself and may reduce the temptation to spend it instead.

Another work-related strategy is to maximize your contributions to a 401(k) or other employer-sponsored savings vehicle. It is advisable to contribute at least the amount that your employer will match, but the most benefit will garnered by contributing the maximum allowable amount. The current pre-tax annual limit is $16,500, but the good news for procrastinators ages 50 and above is the additional ‘catch up’ limit of $5,500. If you can afford it, saving this $22,000 of pre-tax income for your remaining working years can provide an excellent source of retirement revenue.

Making contributions to a Roth IRA is yet another investment option to consider. Roth IRAs can be particularly advantageous for those who will be in a higher tax bracket upon retirement. Since contributions are made after tax, withdrawals are made tax-free. Exploring other tax advantages and determining eligible deductions may be another valuable way to save money.

If you presently are not covered by disability insurance, obtaining a policy may be a worthy investment. Disability insurance pays you a percentage of your monthly income should you become physically unable to perform the duties of your job. This is a great way to protect the funds you have already saved, should something unforeseen occur during your remaining working years.

If your current home is not paid off, downsizing – if and when it is practical to do so – may present another opportunity to save money. However, it is important to consider not only the price of a new home, but the cost of living in a new community relative to the one in which you currently reside. Moving to a smaller home or a condo with high HOA fees in an area in which gas and groceries are more expensive may not be worthwhile in terms of saving for retirement.

Finally, as you approach retirement, it may be prudent to restructure your investment portfolio based on your retirement needs. If you are very close to retirement, your primary focus will likely be to preserve capital and to make your portfolio appropriately conservative. This may include investing primarily in investment grade bonds and less in highly risky stocks. In order to structure your portfolio to maximize returns while protecting your principal investment, it may be in your best interest to consult a financial advisor who specializes in retirement planning.

For more information on investing, visit www.ZionsDirect.com or speak to a Zions Direct representative at 1-800-524-8875.

Alison Andersen is an employee of Zions Bank. Zions Direct is a non-bank subsidiary of Zions Bank.

Take a concrete example. You hold a portfolio of stocks of financial institutions. During the recent credit crisis, these fell significantly in value and many stopped paying dividends. If you hold them in a 401(k) or IRA and if you are in your 30s or 40s and will work for several more decades, their problems probably don’t mean much to you. The share prices have recovered significantly and the dividends are being restored.

From the perspective of an investor with a 20-year time horizon, the decline in price and interruption of dividends was no more than a (rather large!) bump in the road. On the other hand, if you are retired and living on the dividends your investments generate, it was a disaster. Not only was your dividend income from these securities reduced dramatically, but you may have needed to sell a large part of your very depleted portfolio to generate cash … meaning your portfolio may never fully recover even if the stock prices do.

Assessing Liquidity Risk

Similar issues surround liquidity risk – the risk that you will not be able to sell an investment at a “reasonable” price at a time when you need money. Illiquid investments span the spectrum from commercial buildings to oil and gas royalty partnerships. Between 2008 and 2010, such assets could only be sold at fire sale prices. For people with a large cushion of cash or more liquid securities, this illiquidity may have been a nuisance but was probably not a problem. For those who had tied up most of their net worth in “great but illiquid” assets, this period has brought severe financial difficulties.

These examples illustrate that the only effective way to handle financial risks is in the context of a personal financial plan. Such a plan lays out your needs for regular cash flows, how much access to liquidity you might need to pay for college, buy a vacation home and the like. Against that you can array your financial resources: income from work, income from financial assets, and the market, credit and liquidity risks of the assets you hold. You can then test the ability of your current investment portfolio to meet your needs by looking at the financial risks intrinsic to the assets.

When Bad Things Happen

This last step is essential but complex. You can look backward and ask what bad things have happened to these assets in the past, and you can look forward and ask what the current and likely state of the economy and the markets might imply about risks in the future. The past is handy – it actually happened. In contrast, looking forward is only conjecture. But you must look forward. Recollect the widely held belief that “house prices will never fall – they haven’t fallen since the 1930s.” A look at the unprecedented increase in house prices between 1995 and 2007, fueled by unprecedented increases in consumer debt, might have given you pause – leading you to consider whether those extravagant housing prices were sustainable.

Such an analysis will help identify the types of risk that are critical to your situation, enabling you to change your savings level and your portfolio to try to mitigate the impact of the bad things that might happen.

George Feiger is chief executive officer of Contango Capital Advisors, the wealth management arm of Zions Bancorporation (www.contangoadvisors.com).

The information contained in this document is not intended to be and should not be construed as tax advice. It is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code. Contango Capital Advisors does not engage in the business of providing tax advice and estimates should not be construed as such. Clients should consult their tax professionals regarding their personal situation prior to taking any action based upon this information. CCA0611-0108

]]> http://think.zionsdirect.com/2011/07/05/thinking-about-financial-risks/feed/ 0 http://think.zionsdirect.com/2011/06/17/workers-too-often-tapping-401k-not-a-piggy-bank/ http://think.zionsdirect.com/2011/06/17/workers-too-often-tapping-401k-not-a-piggy-bank/#comments Fri, 17 Jun 2011 16:58:31 +0000 David Pitt http://think.zionsdirect.com/?p=9562 Read More]]> DES MOINES, Iowa (AP) — “It’s my money, why shouldn’t I use it?” It’s a mindset that can be a slippery slope when it comes to your retirement savings.

Indeed many workers may be robbing themselves of a secure future by viewing their 401(k) account as a piggy bank that can be tapped all too easily.

There are plenty of ways to rationalize borrowing against your retirement account balance, but the real cost is the loss of potential earnings on a tax-deferred basis in your run up to retirement. And it’s the intangible nature of this lost future income that undoubtedly makes the consequences of borrowing much harder for many to appreciate.

One key concern is that the recession has helped fuel a growth in 401(k) loans. Borrowing accelerated in 2009 as the recession took jobs and homes away from millions of workers who turned to their retirement accounts just to get by. The number of loans outstanding only grew further to a record level last year. More than 1 of every 4 workers with 401(k) accounts, some 27.6 percent, had a loan outstanding, according to human resources consultant Aon Hewitt. The rate had remained steady at around 22 or 23 percent through the mid-2000s.

The consulting company studied the accounts of 1.8 million workers through the end of 2010 and found that using retirement funds for other purposes has become routine for many.

Allowing workers to borrow against their accounts is actually a feature that’s intended to encourage savings. Without some access to the money many workers wouldn’t contribute to their accounts.

It’s a reasonable balance between getting people to save and risking they may not be able to pay back the money, says Jean Young, a research analyst at Vanguard, the nation’s largest fund company.

But rather than making it harder to access their funds, she believes 401(k) plan providers would be better off focusing on getting more people to save in the first place. Only about half of eligible workers enroll in workplace retirement plans.

“Without a doubt the reason why loans are spiking is a direct result of the really difficult economic circumstances working Americans are facing,” said Marcia Wagner, a Boston-based attorney specializing in retirement issues. “It’s economic necessity.”

That was the case for Christian McKenzie, 28, of New York City.

After being laid off from a retail job in the spring of 2009, she decided to pursue a master’s degree in journalism at the London College of Fashion and used some of her retirement savings for the flight over and for expenses.

It was an emotional choice to take the cash out because McKenzie also had to pay taxes and faced a 10 percent tax penalty for making a withdrawal before age 59 1/2. She ended up using about half of the balance she’d built up from contributing for five years.

“It was really hard,” she said. “My family is pretty good with money. They taught me investing basics and saving basics since I was a small child.”

Now back in New York, McKenzie is working as a freelancer helping companies with online marketing and is determined to resume saving for retirement as soon as she can.

It’s very common for individuals who have already tapped into their 401(k), if their plan allows it, to take multiple loans, said Catherine Golladay, vice president of 401(k) participant education and advice at Charles Schwab.

Aon Hewitt’s study shows nearly 30 percent of participants with a loan outstanding, also had a second loan.

More damaging, however, is the practice of discontinuing or lowering contributions while repaying a loan. Some programs won’t allow participants to make contributions during the loan repayment period.

The Aon Hewitt study shows borrowers saved an average of 6.2 percent of pay, while the average among non-borrowers was 8.1 percent. More than 18 percent of borrowers stopped contributing altogether.

There’s also one lingering risk for those with outstanding loans, considering the repayment terms can span several years. If a worker loses a job, or decides to move on to a new employer, most plans require repayment of the entire loan within two to three months. Failure to pay means the loan is treated by the IRS as an early withdrawal and that comes with a tax bill and a 10 percent penalty.

Copyright 2011 The Associated Press.

If you have a 401(k) account, a mortgage, job, car, or if you eat food — or if you have a loved one who does — then chances are you’ve experienced additional stress this year. The economic downturn, experts assure us, has affected just about everyone: rich and poor, young and old, white collar and blue collar, blue states and red. We’re all in this together. But when we’re watching our investments shrink, or looking at a bill we can’t afford to pay, it’s easy to feel very alone.

Insomnia, anger, depression, self-medicating with drugs or food, and panic attacks are just some of the symptoms that have been reported because of “credit-crisis stress.” Here are some tips for coping when it feels like the sky is falling.

Count Your Blessings
Taking a quick appraisal of one’s life and dwelling on the positive can keep that sense of panic at bay. Even with smaller savings accounts, many of us are better off materially than those who came before us. Do you still have shelter, hot running water, food on the table for yourself and your family? Then you’re blessed. Don’t just pay lip service to this idea; use your imagination to experience what life would feel like without the material comforts you may sometimes take for granted. Then open your eyes and step back into your own life.

Remember History
Many of us admire the “Greatest Generation,” but few wish to walk in its shoes. We’ve had it easier than our parents and grandparents who survived the Depression and World War II and went on to flourish. Now it’s our turn to have our mettle tested. Can we work together to find solutions to this crisis as they did?

Have Faith
Times of trouble serve as reminders to have faith in the things we believe in, whether that’s God, community, family or self.

Control What You Can
Part of what makes an economic downturn so frightening is the feeling that it’s out of our control. But in reality, it never was in our control. Try focusing on another source of stress. Choose something over which you do have control, and then tackle it head on. Been putting off visiting a loved one in need, or some other task? Do it now. Asserting control and eliminating a stressor is a great way to combat negative feelings.

Turn Off the TV
Human beings are empathetic. When we hear the voice of someone in distress, many of us will feel distress as well. For this reason, staying glued to the television, radio or Internet for constant updates can be counterproductive. Turn the electronics off and go for a long walk instead. Chances are you’ll feel much better.

Get Help if You Need It
If you’re having trouble paying your bills, you’ll want to act right away. The National Foundation for Credit Counseling can recommend a trustworthy credit counselor in your area.

Don’t Stop Saving
As long as you’re paying your bills, keep saving, even if it’s only a little each month. You can ride out the current uncertainty by putting savings in CDs until the market improves.

Featured in the March/April 2009 issue of Zions Bank’s Community magazine.

*Artwork from arimoore under Creative Commons license at Flickr.com.