035: How To Protect Your 401(k)
Nov 5, 2020
For many people, the 401(k) is one of the biggest parts of their retirement portfolios. In times of great uncertainty, and especially of market volatility, many want to know how to protect their most valuable assets. Especially after the Great Recession of 2008, it’s easy to want to make rash decisions. However, it is a great time to assess your overall risk and understand how best to protect your money – and yourself.
Everyone’s situation is different. There’s no one-size-fits-all solution to retirement planning, and every family likely needs to take different approaches and positions to ensure that they will be able to enjoy retirement on their terms.
Today, we’re talking about how to invest – or simply defend your portfolio – in times of volatility. You’ll learn about the unique factors that lead to market instability, how to understand your exposure to risk, and the important questions you and your advisor should be discussing as you create a 401(k) to meet your unique needs.
Here are just a handful of the things that we'll discuss:
- How the COVID-19 pandemic, elections, and a wide variety of other factors can create wild market volatility.
- Why investing is more about how much money you’re willing to lose – and why you don’t benefit from looking at your account every day.
- Why you can’t make changes to your retirement accounts overnight – and why working proactively with your financial advisor will almost always lead to better outcomes.
- “It is insane to risk what you have and need in order to obtain what you don’t need.” – Warren Buffett
LeAnne Siddell: It’s The Retirement Trainer with Ed Siddell, a podcast about finding ways to help you become financially fit for your future no matter what financial shape you’re in now. Planning for retirement, well, your 401(k) is one of the biggest parts of most people’s retirement, and in times like these, how does one protect your biggest asset? This is LeAnne Siddell and here to help us with all of our questions and give us some guidance to help us stay in the best financial shape possible, the retirement trainer, Ed Siddell. Hello, Ed.
Ed Siddell: Ola. What’s going on?
LeAnne Siddell: Okay.
Ed Siddell: Crazy times.
LeAnne Siddell: I know. I know.
Ed Siddell: Crazy time. So, Election Day is tomorrow.
LeAnne Siddell: Yes, yes.
Ed Siddell: Yeah. These are…
LeAnne Siddell: And we’ll know what the election results are in December? No joke.
Ed Siddell: Yeah.
LeAnne Siddell: That’s not funny.
Ed Siddell: Let’s hope we know, we just know. Oh goodness, can’t make this stuff up.
LeAnne Siddell: Well, that’s just it. You know, we started looking last week and seeing the craziness of the market last week.
Ed Siddell: Yeah. A lot of volatility. Our math was telling us weeks out that it was going to get a little crazy.
LeAnne Siddell: Well, that was kind of where you instigated some of these videos you sent out to clients just to say, “Hey, there’s going to be a lot going on in the next couple of weeks. Keep an eye out, and more importantly, call. Let’s discuss where your 401(k) is, let’s discuss where your IRAs are. Let’s take a look…
Ed Siddell: Everything, yeah.
LeAnne Siddell: Yeah, at how you’re invested.
Ed Siddell: You know because this 2020, it’s been a crazy year. I mean, the whole COVID-19 and not just from the health aspects. I’m talking about the overall effect it’s had on our country, our economy, people’s finances, their retirement savings. And when we talk about retirement savings, we’re talking about their 401(k)s, 403(b)s for federal employees, their thrift savings plans, 457, and the list goes on and on and on. And that’s such a big part of people’s retirement because for the average American, other than their homes, that’s their single largest asset is the retirement plan. I was talking with Kim, a family, a week before last, and she said that she and her husband, they consider themselves very normal, kind of average, everyday people here in America. And she’s concerned with the current climate. Their biggest concern is their 401(k) and like she said, “We’re not rich. We don’t have a ton of money,” but they are depending on their 401(k) for retirement. And she was concerned because she didn’t want to have a repeat of 2008. When she and her husband lost a ton of money and they’re getting close to the finish line. They’re in that red zone where they’re within a couple of years of retirement, they’re not willing to take a step back and, and maybe have to work an extra year or two until things kind of settle down.
LeAnne Siddell: Well, and that’s kind of why you give the five-year mark, right?
Ed Siddell: Yeah. I mean, you’re right and time is a big part of it. The question is people always say how do we protect our 401(k)s? How do we protect that asset? And it’s not a simple answer because everyone is different and you hear me say it all the time. You can’t look at it myopically as, “Hey, this is a singular thing.” It has to be part of the overall plan, right? And these are very challenging times right now. The economy is recovering. Everything’s based on the math, just look at the math because we had the largest one-quarter growth in US history. However, before that, we also had one of the biggest drops.
LeAnne Siddell: Well, that’s kind of why 2020 will go down as in relation to people’s retirement accounts as having probably the most punches to the gut in one given year, just as the unknowns, the unknowns that hit the market.
Ed Siddell: Yeah. And the economy, even though we had all that growth, there’s still a lot of companies that aren’t open, there’s still a lot of states that never ever opened or only partially, and we’ve seen a rise in a lot of COVID cases, whether you agree or disagree. I mean, it’s causing a lot of these states to now start kind of closing these businesses again or tempering them. And so, that has an effect on the economy and I bring this all up because everything has to do with markets and the market hates bad news. It absolutely hates it, but what it hates even worse is uncertainty. And there’s so much uncertainty right now when it comes to the economy and businesses. There’s so much uncertainty when it comes to the health aspects of COVID and the impact that it’s going to have on everything and there’s a lot of uncertainty on what’s going on tomorrow, Election Day, November 3, right?
LeAnne Siddell: Yep.
Ed Siddell: So, we just talked about this. When you’re in that red zone within two to five years of retirement, you don’t want to go through another 2008 or 9/11 or even earlier this year. We’re all very lucky, very blessed that the recovery of the market, it almost broke even in six months. I mean, that’s unheard of, after that big of a dip. So, as you get closer to that point in time taking some of the chips off the table, some of those savings, and protecting some of those assets, it’s really important, but keep in mind when we talk about this on this podcast, we’re speaking in generalities. Everyone’s situation is completely different and depending on your situation, again, it should be part of your overall plan. And one of the questions when we meet with families and we’re trying to help them out, one of the first questions that we ask is, which is a really weird question is how much money are you willing to lose? It’s not about the returns, right? We say it all the time.
LeAnne Siddell: No. That risk component, that is the big, when they are looking at the overall picture, knowing that they’re in the market, what do you want?
Ed Siddell: It’s a risk, right? And so, when I asked that question, no one can see me, but I’m actually holding a zero. When I say how much money are you willing to lose? Nothing, I don’t want to lose anything. And I get that. You know, but the reality is how much do you want to lose? How much can you lose and still be able to sleep at night? And I always go back to Warren Buffett’s quote that he’s used a couple of times and it was a little prophetic when he used it at the end of January of this year, January 2020, when he said that you would be crazy to risk what you have for something you don’t need. And he was posed a question of, “Hey, why are you moving the cash? There’s a lot of goodbyes out there and the market was on the run, blah, blah, blah.” And so, when you’re thinking of a Warren Buffett coming up and that kind of thought process, that’s the same process that we have when we’re helping families. You know, why would you put everything you have at risk if you don’t have to?
LeAnne Siddell: Yep. So, as we are looking at this and giving people practical advice on what to do, you would say, what about how the 401(k) is invested?
Ed Siddell: Yeah. And let’s kind of set the foundation. So, it may make a little bit more sense, obviously, the closer you get to retirement or especially if you’re in retirement, you need to make sure that you have enough money that’s not at risk so that you can live and enjoy life if the market takes a downturn like this year or there’s a lot of volatility and be able to maintain your lifestyle and see your grandkids and see your kids.
LeAnne Siddell: And not be looking at your account every day.
Ed Siddell: And saying, “Oh my gosh, how can I pay my bills, right?” You know, and so this is really we use the prudent investor rule, which is really the rule of 100. And again, I’m talking about generalities. And so, our whole concept when we’re helping families, the way that we plan we use safety, income, and growth so you have to have money that’s safe. And when I say that that’s liquid accessible, that’s your emergency funds, right? Six to 12 months, cash on hand. I’m not talking about guarantee or anything. I’m just talking about money that you need so that, God forbid, you lose your job or your spouse loses their job, then you have your money for income, which is really the conservative bucket and then you have your money for growth. And so, when you think about the money that’s for growth, that’s your 401(k). That’s what’s invested in the market, your stocks, your bonds, your mutual funds, some 401(k)s or exchange-traded funds and the list goes on and on.
And the question is, well, how much should we have in that growth bucket? Well, again, we use that concept, the age-based investing, the prudent investor rule, which is the rule of 100, that’s where you take your age, you subtract it from 100, and let’s just say that you’re 60 or 65. We’ll use 60. Okay. That means if whatever dollar amount that you have, you should never have more than 40% of that money at risk in the market. Now, again, these are rules, general rules, guidelines but I always use this as an example when we’re teaching a class. We use our kids as an example. When they were all born, we were very aggressive as far as saving for college. And once they got close to high school, we started taking chips off the table. And by the time they were seniors in high school before they’re going on to college, we had a lot of money that was ultra-conservative and a lot sitting in cash. And the reason is, we didn’t want to have to worry about the market going up and up and up. And as soon as we needed the money, the market crashed and now we’re going to have to sell everything at a deep discount and lose money.
We’d have enough for the first couple of years, but then eventually, what? You run out of money. And it’s the same concept when it comes to retirement. Now, you have to have money over on the growth, right? I mean, you just have to, to hedge against things like inflation and health care, spousal income replacement, long-term care, all these things. But everything that you don’t need that’s for growth, that other 60% is really should be on the other side and split between your income, conservative bucket, and safety because you want to have enough money over there whether it’s social security, pension, annuities, dividends, rental income from real estate, whatever your sources of income are going to be, that no matter what the market does, you’re going to be able to maintain.
LeAnne Siddell: You still got stuff to pay the bills.
Ed Siddell: That’s exactly it. Okay. So, now that we’ve kind of set the stage for that, that’s why I’m saying what you have in your 401(k), it should be part of the overall plan because that’s part of the safety, income, and growth. What’s that total dollar amount that you have? And how much are you willing to lose? The average family when they come in, I think I can count on one hand the number of people that have not said zero, but no one wants to lose any money, and rightfully so but they’re willing to take a little bit of risk and let’s just say that they’re willing to lose 10%. And if that’s $500,000 of total savings that they have, that means they’re only willing to lose $50,000. Or if it’s a million of savings that they have, that means only willing to lose 100,000, and that’s a lot of money. In most families, it’s somewhere between that 8% to 15% range. So, then if you’re looking at that and you’re looking at your 401(k), especially if you’re getting close to that retirement, that red zone, then you can start saying, “Oh, wait a minute, Oh, my gosh, I have 100% of the money.” And that’s pretty typical. You know, I have 100% of my money over in growth.
LeAnne Siddell: And we’ve seen that, and we’ve seen that many, many, many times.
Ed Siddell: 90% of the folks, the families that come in, I’ll say even and we’re being conservative, have 90% to 95% if not more of their money over in growth in over the last 10 years, except for 2020. I mean, it’s been a good thing, right? I mean, it’s been a good and bad thing. So, it’s been good because the last 10 years, the market’s almost doubled up until this year. It’s been a bad thing because there’s a little volatility, a lot of risks that people are taking, and that came out this year in 2020.
LeAnne Siddell: Well, I think, even aside from 2020, the lesson that 2020 has taught a lot of us that are on the side of looking at retirement within the next 10 years, you have to be proactive. You can’t just sit back and say, “Oh, I’ll look at this six months before I retire.”
Ed Siddell: Ostrich. Yeah. I’m just going to put my head in the sand. It’ll all go away. And it will all go away. And that’s the problem, right?
LeAnne Siddell: And that’s where you talked about the plan, you talked about sitting down and having somebody look at your overall picture, but that is so important when you’re dealing with retirement being so close, that you have some kind of plan at play here.
Ed Siddell: Yeah. And your advisors should be reaching out to you and asking these questions. And if they haven’t, give them a call and say, “Hey, as part of my overall plan, what adjustments should we make?” In all fairness, the way that the Department of Labor works, advisors, even fiduciaries like us, I mean, we can’t log on to people’s accounts and we can’t make those changes. So, you’ve got to be a little proactive yourself and say, “Hey, I need help,” and hopefully, they’ve reached out to everyone that said, “Hey, give us a call.”
LeAnne Siddell: Well, and that’s the one thing that I want to nail down. You are able to help when you get on the phone with somebody and they are talking to you about their 401(k). You are able to help. You’re just not able to get on. You’re not managing those funds. So, an advisor is somebody that can say, “Oh, this is what you’re invested in. This is what your risk is based off, all these things that you’re invested in.”
Ed Siddell: Yeah. And then these are the options that you have. So, when you do talk with your advisor, you need to have your current investment lineup, which is everything that you have available to you to invest in that’s offered through your 401(k) plan or a Thrift Savings Plan or 457 or whatever it is. And then you’ll also need to have what you’re currently invested in and hopefully, you’ll give that to your advisor ahead of time so that they can do a little bit of research and go through it. Most of us, we do it on the fly but being able to do a little bit of research and give you the answers that you need, again, making sure that it adheres to your overall plan. Now, I’m going to say one thing. We’re talking about people that are close to retirement and the concept of age-based investing, and these are general rules. But we also have families that we’re dealing with that aren’t close to retirement, but they’re still not willing to take the risk. And again, it’s not about the returns. It’s about the volatility. So, being able to manage the volatility and the volatility is the ups and downs, super high returns, super low losses, or super big losses, too. So, it goes up, up and down, and being able to kind of smooth that out, then you don’t have to chase those returns over the long haul. And if you can have a nice steady ride, it’s going to be a lot more enjoyable. So, being able to make these adjustments for a lot of folks, it’s going to be a good thing no matter what your age is.
LeAnne Siddell: We all feel a little bit better when we’re proactive about things and so I’m going to lead you right into. Sorry.
Ed Siddell: Yeah. And here’s the thing. So, if you’re getting online and you’re making changes on your 401(k) plan, just remember, it’s not going to be like your brokerage account. It’s not instantaneous. So, you’re looking it could take 24 or 48 hours and we’ve heard over the last week or so that some of these custodians and administrators they’re taking upwards of five and six business days, not calendar days. So, again, just make sure that you’re talking with your advisor, getting the answers that you need as part of your overall plan to make those decisions.
LeAnne Siddell: This is not a snap-your-finger change.
Ed Siddell: That’s correct.
LeAnne Siddell: So, how can people find out what they need to do as far as saving on taxes or…?
Ed Siddell: Yeah. When you’re talking about your 401(k) and saving on taxes, again, since you’re going through this whole process, look at what you have in the traditional part, the pretax, as well as into the Roth 401(k) because remember, we don’t know what taxes are going to be down the road. But this goes hand-in-hand with your investments because wealth is not what you make or what you save. It’s what you get to keep. So, again, working with your advisor as part of your overall plan is going to be key.
LeAnne Siddell: All right. So, if you need to find out a little bit more information, you want to get a hold of Ed, you can get a hold of him at EGSIFinancial.com. You can also send him an email through email@example.com or give us a call at the office and we will get you in touch with him at 614-526-4118. Thanks, Ed.
Ed Siddell: Absolutely. And if you have questions and you want us to review your 401(k) plan, no cost, no obligation. Just give us a call. We’ll do everything we can to help you out. Thanks, LeAnne.