Imagine you’re a secret spy behind enemy lines. You’ve invested your time, blood, sweat and tears. Day after day you follow your plan to complete a mission successfully. Although you’ve had a few setbacks you’ve managed to rise above it all and come home alive. But one day the unthinkable happens. You get a notice from your handler back at Langley that you’ve been cut off!
There’s no support or reason. All they can tell you right now is that you’re out of the loop. In spy talk this is known as a “Burn Notice.”
In 2008 you may have received your own “Burn Notice.” Your financial statement showed you a loss of up to 20%. That’s not what you had in mind for retirement. Right now you don’t need a financial setback. You need to move forward and build value.
In the popular television show “Burn Notice”, our hero has two choices. He can either wallow in his pity and die or bounce back. Here’s an easy 5 step plan for healing from a 401K “Burn Notice.”Five Easy Steps To Heal the Wounds
Step #1: Get Aggressive
The fastest way to rebuild your 401K is to invest more in it. Let’s say your 401K value was $10,000 in 2008. If you lost 20% that means it fell to $8,000! Depending on which mutual funds you chose you may have lost $2,000-$3,000 more. But don’t put a gun to your head super spy! Instead get back to the basics. Remember those retirement goals you set? Get aggressive by investing 10% of your monthly paycheck. Forget 3-6%. We’re talking about recouping your losses for the retirement you deserve. Here’s what can happen if you use the 10% rule.
401K Balance: $8,000
Annual Salary: $40,000
Salary Increase: 3% a year
Monthly 401K Investment: 10%
Employer Match: 50%
Frequency Match: 6%
Years to Fund: 20
Compounded Rate: 9%
At the end of your first “rebound year”, you’ll make back $14,082.43! Not bad for having the carpet ripped from under you. After five years you’re back in the saddle with $46,212.96. If you go twenty years out get ready to smile. Your aggressiveness will literally pay off. This one step will bring you $384,304.06 for retirement! And just think you haven’t even made it to step 2.
Step #2: Spend Less
According to a new Gallup Pole 60% of Americans say they’re spending less and saving more. After a gazillion personal finance books on this subject, Financial Advisors are finally getting their due! We both know it’s a boat load of fun to spend money on ourselves. But let’s face some hard facts. When the financial crisis hit, we were caught with our, well accounts down. Few of us had any money in savings to cover our losses. It’s a hard lesson all of us learned. Develop the habit of spending less and saving more. Putting an extra $25-$100 into your 401K can literally pay dividends.
Step #3: No Early Withdrawals
My mom has a favorite saying. “Son, stop shooting yourself in the foot!” I don’t know anyone who’d blast their foot while being sober. But when it comes to 401K’s, it’s a frequent and costly habit. If you’re 401K is growing by a whopping 10% or more per year, why drain it with early withdrawals? When you withdraw retirement funds before age 59 ½, you’ll pay a 10% penalty tax. Having frequent withdrawals is like climbing Mt. Rainier in the winter with ice skates! Allow your 401K to rebuild as you continue to contribute.
Step #4: Be Proactive
Hey, I’m with you. I’ve got enough on my plate. Keeping up on my 401K adds to my daily pile. But here’s the good news. One day your pile of kids, work and other duties will be over. Being proactive now will allow you to relax later on. Read your monthly statements. Call or e-mail your Fund Manager and ask questions. Read magazines like Money, Kiplinger’s Personal Finance Magazine and others. Learn what’s going on in the economy. You don’t have to be a Wall Street fat cat to understand money. If you know the company managing your 401K, hop on their site and see what’s going on. What new programs do they have available? You never know when a company like Vanguard will come up with a new type of 401K plan.
Step #5: Review and Make Changes
If you’ve never met David Phillips, you’re missing out! He’s one of the brightest people I’ve met. As a CEO he’s constantly reviewing and making changes to his financial services. He’s partially responsible for www.FinancialAdvisor.org. It’s a one stop website for the best Financial Advisors in the country. One of the secrets to his success is his ability to constantly review and make changes to his business. This includes evaluating systems, strategies and financial technologies.
Set up a review and change system for your 401K. Don’t let it idle like your backyard. If 5% of your portfolio lost value, find out why. Make the necessary changes to try and increase the value by 10%. Your Fund Manager will gladly help you set one up.
Make no mistake my friend. You can rebuild your 401K in a down economy. Put these five steps to work and your 401K will start growing. And remember my soap box message. Talk to a skilled Financial Advisor.