Reader’s question: We all see the market going up and down but when I received my 401k statement recently it had lost as much as I had invested (10%) in the 1st quarter. I am getting closer to retirement but fear I’ll not have enough money to do so. I have a child out of college and one in grad school. I am confused why they can’t move this money in and out of these high risk investments? Do they make money on my losses? W.C.
Answer: Investing in general, and in a company retirement plan in particular, is confusing for many people. With a company retirement plan, people often mistakenly believe that the company is ‘overseeing’ and making decisions on the investments. However, the ‘they’ that you refer to in your question is YOU! With a 401k, the company simply provides a framework to allow you to payroll deduct money from your paycheck into a tax deductible retirement plan. In addition, the company often provides an incentive for you to invest by offering to match your contributions up to certain limits. As a plan participant, it’s up to you to choose how to invest the money. Most 401k plans offer a wide variety of mutual fund choices including domestic as well as foreign stock and bond funds; blended funds (that include both stocks and bonds); money market funds and so-called lifestyle funds where the investment manager automatically adjusts the stock/bond mix to become more conservative as you approach your expected retirement date.
The past decade has been a challenge for stock investors, and today, an even bigger challenge is how to invest in bonds because interest rates are at historical lows. Based on your question, I suspect your 401k owns a healthy dose of international stock investments which have been hard hit by the latest European crisis. I have two recommendations for you. First, consider meeting with an investment professional to review your current investments as part of a retirement analysis. You need a keen eye to help you develop a strategy tailored to your particular facts. Second, I’d encourage you to rethink retirement. Today, people are living longer and healthcare costs continue to rise. One of the best retirement strategies is to postpone retirement and allow more time to build financial resources. For the ‘second half’ of your life, seek a job that you love that has some added flexibility for scheduling time off.
And, no, your employer does not benefit whether your 401k makes or loses money.
Reader’s question: I am a widow, age 85, and own my home. Should I place my daughter on the deed with me so that she will not go through probate to inherit it when I pass on? I have two daughters and I intend to leave my estate to them equally but have been told you cannot put two people on your deed. K.B.
Answer: First, there is not a legal limit that I am aware of as to how many people can be added to a deed but I’m not certain this is your best choice. By adding your daughters to your deed, you may have inadvertently made a gift to them of part of your interest in your home and this could create unintended tax consequences. For example, let’s assume you paid $100,000 for your home but today it’s worth $150,000…meaning you have a gain of $50,000. If you die and they inherit your home, they will receive it with a ‘stepped-up cost basis’, meaning they would now own it as if they had paid $150,000 and could turn around and sell it with no tax consequences. However, if you add them to the deed now and it’s treated as a gift, they could owe income taxes upon a sale after your death. Income tax specialist, John West, CPA adds, “Adding the daughters to the deed now could also cause additional income tax to be owed if the property was sold for a profit prior to the mother’s death resulting in a taxable gain on the daughters interest in the property.”
I would strongly advise you to consult with a qualified tax attorney or CPA before making this decision.