Last week, I visited with the former employees of New United Motors Manufacturing (NUMMI), the Fremont car company which ceased operations in 2010. NUMMI recently notified its former workers that they would be receiving assets from the company’s now terminated Pension plan, and I was among a select group of financial professionals invited to help.
Imagine walking in the shoes of these employees! Many of them have vested pension account balances in the tens of thousands of dollars, and they have a relatively short period of time – 30 days – to select from among the many elections being presented. The choices are not easy and I met people afraid and uncertain about what they should do.
People faced with important financial decisions – especially when the choices involve a lot of money – often experience a range of emotions. And too frequently, fear and anxiety can make an already complicated set of options even more difficult to evaluate, leading people to make irrational decisions which may imperil their long-term financial situation.
So in this month’s blog, I thought I would share common errors to avoid and offer some tips to anyone faced with choices about retirement plan distributions. Here is what you can do to avoid unnecessary financial pitfalls and help optimize your financial situation at such an important time in your life:
1) Don’t take a cash, lump sum distribution and pay good old Uncle Sam a pile of money. You will be taxed by the Federal and State government and you will have to pay an additional 10% penalty if you have not yet attained age 59½. This advice may sound obvious to a good number of you, but if you are seriously considering it, don’t do it!
Even if you may need the money for near-term living expenses, you should still roll it over to an IRA – you can always keep the money in cash or cash-equivalents so that you can easily access it to pay bills. But if you immediately take the money now and then you later find other (non-retirement) money to sustain your short-term finances, you would have needlessly paid unnecessary taxes and penalties. That is because the decision to cash out is usually irrevocable.
So, put the money in an IRA and use the time to identify other sources of money that will help you avoid the need (or at least delay it) to take money from your retirement accounts.
2) For retirement assets that you will need to attain financial goals that are a few years or many years in the future, do NOT leave the majority of this money invested in cash or cash-equivalents. This might sound contradictory to the advice I gave above about keeping some of your retirement money in cash, but it really is not.
It is true that money you may or will need for living expenses over the next year should NOT be invested in the financial markets. However, any money not needed for such near-term living expenses should likely be invested in something, depending on when you will need the money and the risk level (low, moderate or high) that is appropriate for the goal.
I know there are some of you out there who are absolutely terrified of the markets, but the decision to stay in cash (again, for money that is ear-marked for medium and long-term goals) is one that will almost guarantee the erosion of your money’s purchasing power over the years. That’s one of the few guarantees available these days, but it is unfortunately not a good one!
That is because the money in a savings account earns about zilch in interest, and the “purchasing power” (or the amount of goods and services that your money can buy) is actually declining every day! Inflation is increasing the prices of everything that you will need when you begin to draw down your assets at some point in the future.
So, what should you do if you are concerned about your money losing ground to inflation, but you are also unsure about the volatility in the financial markets? One option is to allocate your money into investments that are NOT tied to the stock market.
Email me at firstname.lastname@example.org if you are interested in learning more about these ideas! But, remember, doing nothing and leaving your money in cash is a choice, and the decision may expose your money to a risk that you may not have considered. You might feel that decision is a safe one, but you will be accepting the hidden but very real risk that your money might have less purchasing power in the long-term.
3) Don’t make a hasty decision without getting advice and becoming informed. The rules about taking distributions from retirement plans are extremely complex. This is especially true for any of you in your 50s – there are some provisions in the tax code that can actually be very helpful (I’ll write about these in a future blog), but you can only benefit from them if you are informed about them before you take action!
Do not assume that the choices you have previously made a rollover is the correct strategy for today. A financial professional can assist you in clarifying the options specific to your situation.
The money in employer-sponsored retirement plans now represents a substantial percentage of most Americans’ long-term savings. My discussions with former NUMMI workers last week reminded me of the importance of developing a strategic plan for your retirement assets and of becoming properly informed about your options. Don’t let fear, anxiety or inertia lead you to a hasty and ill-conceived decision – instead take a deep breath and calmly take a close look at all of your options!
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, please consult with your financial advisor prior to investing.
Investing involves risk including loss or principal.