A: Yuck. Start looking for a new job.
At your current job, you would have about $246,000 after 30 years. Is what they're paying you worth giving up $1.8 million in potential retirement benefits?
If you're a regular employee--in other words, if you get a W-2 from your new company--you don't have many other options. Because your employer is already contributing $1,500 to a simplified employee pension IRA, you're considered an active participant in a retirement plan, which precludes you from deducting contributions to your own IRA.
Unless this new job pays enough for you to save plenty on your own, you should find an employer who knows that a decent retirement plan is a requisite for finding and keeping good people.
Q. In investing for retirement purposes, is it still advisable to consider the rule of thumb of 100 minus your age as the maximum percentage you should have invested in the stock market? I am 46, currently not working, and am considering moving my 401(k) from my former employer and investing in other choices.
I have the funds spread in a range of low-, medium- and high-risk stock funds, with about 20% in Treasuries and 20% in a balanced fund. I have been considering moving to a discount brokerage through my bank, where I know the investment representative. I would then get some expert advice and ongoing attention, which I don't have with the 401(k). Your thoughts?
A. When it comes to personal finance, forget rules of thumb. There are many concepts that are true for most of the people most of the time, but there are so many exceptions to personal finance rules that you can't expect one-size-fits-all standards.
The rule of 100 is a case in point. The idea was to shift people out of riskier investments (stocks) and into safer investments (bonds and cash) as they aged and their ability to recover from losses diminished.
As a general concept it's not a bad idea, but it ignores too many variables to be truly useful. It doesn't take into account your goal for the money, how long you might live, your employment prospects, your tolerance for risk and what other options you have.
A secure pension can allow you to take more risks with your other retirement funds, for example, whereas the lack of a guaranteed check in retirement should make you somewhat more conservative.
If you need some kind of starting point, look no further than the mix of stocks and bonds in a balanced fund: typically 60% stocks and 40% bonds. That gives you exposure to stocks' long-term gains while softening the blows of stock market downturns with the bonds' interest.
If you feel emotionally able to ride out wide market swings and you don't think you'll need to tap your retirement funds any time soon for living expenses (always a dark possibility during unemployment), you can increase the proportion of stocks and stock funds in your portfolio.
I wouldn't go beyond 80% stocks and 20% bonds and cash at any age, though. Not many investors today have had experience with a real bear market in stocks; those of us who think we can stomach a 40% loss, or more, may feel different if and when it happens.
As for moving your money from your former employer's 401(k) to a brokerage firm: If you do so, make sure you roll the money directly over into an individual retirement account to avoid a huge tax bite. Also, remember that "expert advice" and "ongoing attention" can translate into 'making a lot of commissions by trading frequently in your account.' Don't let that happen.
Despite the boom of do-it-yourself and online trading, I have yet to see any evidence that trading a lot boosts returns. In fact, studies to date show it harms the average investor's results. Investors also seem to have an uncanny knack for selling one stock to buy another that subsequently does worse than their original pick.
Besides, unemployment is no time to be taking extraordinary risks with your retirement funds. Although you probably will return to work at some point, every day that passes is another day you don't have to earn money for retirement.
Q: I'm 48 and my husband is 51. We have unwisely run up more than $40,000 in unsecured credit card debt over a number of years. We have no equity in our house. We know it's almost always a terrible idea to borrow from a retirement plan. With the interest savings, though, we wonder if we couldn't get this debt paid off quicker and save ourselves more money overall by taking money out of my husband's 401(k). What sort of formula should we use in deciding if this will help us or not?