Don’t withdraw money unless you need it to support yourself. Just because you are retired and can withdraw funds without penalty does not mean that you have to withdraw the funds. You can continue to let the funds grow on a tax-deferred basis until you reach age 70 ½. At that age, if you are retired, you must start taking out at least minimum withdrawals.

Carefully calculate how much you can withdraw on an annual basis. Don’t just decide how much you need and withdraw that annually. And don’t rely on simple rules of thumb, such as only spending the income generated by investments. These approaches may result in serious mistakes, such as running out of money or living an unnecessarily frugal lifestyle. Instead, calculate how much you can withdraw based on your expected life expectancy, the targeted long-term rate of return on your investments, your expectations about the long-term rate of inflation, and how much of your nest egg you want to leave to your heirs. Also reevaluate your calculations periodically to make sure that the amount you are withdrawing is still reasonable.

Review your investments. Make sure that your allocation among asset classes is reasonable as you approach retirement. Since your funds may need to last for 25 years or more, make sure that you are not over-concentrated in fixed-income securities, which may not provide adequate protection against inflation. Stocks, while subject to more volatility, may need to remain a significant component of your investment portfolio until well into your retirement years.

Determine whether you want to leave your funds in your employer’s 401(k) plan. You can roll over the funds to an individual retirement account (IRA), which can offer a wider variety of investment alternatives. Or you can use the money to buy an annuity that will make guaranteed payments for your life.

Get advice. The decisions you make regarding your 401(k) funds will have a major impact on the quality of your retirement. Call so that together we can review your options.

Re-analyze each individual investment. Take a fresh look at each investment you own, making sure that the reasons you chose to initially invest still remain valid. Also reassess the future prospects of each investment.

Review your current asset allocation. Calculate what percentage of your portfolio each asset type represents. Then decide whether that allocation makes sense for your situation or if should readjust the assets.

Measure the performance of each component of your portfolio, comparing it to an appropriate benchmark. Many of your investments will provide you with performance information on a periodic basis, while you will have to calculate the return yourself for other investments. This review should help you identify parts of your portfolio that may need to be changed or that you should start monitoring more closely.

Calculate your rate of return for your entire portfolio. You can then compare whether your actual return is on track with the return you estimated when designing your investment program. If your actual return is not what you targeted, you may have to increase the amount you are saving, invest in more aggressive alternatives, or settle for the possibility of less money in the future.

Simplify your investments. You may find that you own several stocks within one industry or several investments with similar objectives. Reducing the number of investments owned will make it easier to monitor those investments.

Consider other types of investments. If you’ve been meaning to invest in international stocks, real estate investments, or other types of investments, but haven’t found the time to do so, take time now to evaluate those possibilities.

Evaluate your tax situation. Although you shouldn’t make investment decisions based solely on tax considerations, your tax situation is an important component of your investment strategy. As you move into higher tax brackets, you may find that certain investments, such as municipal bonds, become more suited to your situation. Or, by not selling an investment for a couple of months, you may be able to reduce the capital gains tax rate applied to the gain on that investment. Selling an investment at a loss may offset other gains or may be deductible on your tax return.

Reevaluating your investment portfolio requires considering a variety of factors. Need help going through this process? Feel free to call us at (800) 878-4036.

The term program trading is used to describe three different types of trading strategies:

Market index arbitrage involves the simultaneous purchase of stock index futures and the sale of stock portfolios (or vice versa). The objective of this strategy is to take advantage of price discrepancies between stock index futures and the prices of the underlying stocks.

Portfolio insurance or hedging is a strategy designed to hedge stock holdings from loss by either selling stock index futures or buying stock index put options.

Trend-based computer trading is a strategy that initiates an automatic buy or sell order when a rise or fall of a certain size occurs in a stock index. Pension fund and other institutional investors often use trading programs.

For the last several years, program trading has averaged 20% of the volume on the New York Stock Exchange (Source: Investor’s Business Daily, August 26, 1997).

Program trading was considered at least partially responsible, through increased volatility and acceleration of the market decline, for the stock market crash in October 1987. As a result, two of the four New York Stock Exchange trading restrictions now imposed on the market are aimed at controlling program trading. (Past performance is no guarantee of future results.)

Leave the funds in your former employer’s 401(k) plan. Generally, if your balance is at least $5,000, you can leave the funds in your former employer’s plan until you retire. However, you will not be able to borrow from your account. You may want to leave the funds with your former employer temporarily until you consider your other options.

Transfer the funds to your new employer’s 401(k) plan. Find out if your new employer’s plan accepts rollovers. If so, you can generally make the rollover even before you become eligible to participate in the plan. Be sure to get the appropriate paperwork from your new employer and to make sure the funds go directly to the trustee of your new employer’s plan. Otherwise, your former employer will withhold 20% of the funds for taxes. You will then have to replace the 20% from your own funds within 60 days or the 20% withholding will be considered a distribution, subject to taxes and the 10% early withdrawal penalty.

Roll over the funds to an Individual Retirement Account (IRA). Rather than transferring to an existing IRA, however, you will probably want to set up a separate IRA, called a conduit IRA. First set up the conduit IRA and then have your former employer transfer the funds directly to the IRA trustee to avoid the 20% tax withholding described above. If the funds are transferred to a conduit IRA, you can roll over the funds into another employer’s 401(k) plan in the future. If the funds are commingled with an existing IRA, you won’t be able to roll it over later.

If you’re changing jobs and would like help with your 401(k) funds, please call us at (800) 878-4036.

THE WORLD OF REITs

Real estate investment trusts (REITs, which rhymes with streets) pool the funds of many people into a portfolio of commercial real estate investments. REIT shares are publicly traded on the major stock exchanges and can have fluctuating principal and returns based on changing market conditions. There are three basic types of REITs:

Equity REITs own income-producing property such as apartment buildings, shopping centers, and office buildings.

Mortgage REITs own long-term mortgages and construction loans on commercial properties.

Hybrid REITs own income-producing property and mortgages.

REITs receive special tax treatment — as long as several requirements are met, they do not have to pay corporate income taxes on their earnings. One of the major requirements is that 95% of earnings must be distributed to shareholders.

Before investing, the most fundamental decision to make is whether you should even consider REITs, which depends on your unique investment objectives. Some items to consider if you are interested include:

Examine the types of properties in the REIT’s portfolio, paying attention to diversification among property types and geographic location. Review the vacancy rates at the properties. Find out how much leverage is used in the REIT.

Review the history of dividend payments and the percentage of cash flow the dividend represents, keeping in mind that past performance is no guarantee of future performance.

Examine the relationship between the market price and book value of the REIT.

Carefully review the management team’s qualifications and experience. Examine the fees charged.

Please call if you’d like to discuss REITs in relation to your investment objectives.

RETURN TO NEWSLETTER MENU