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Overcoming market meltdowns
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June 14, 2001: 9:55 a.m. ET
Lost savings in the 2000 stock avalanche? Stop the outflow and get back on track
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NEW YORK (CNNfn) - The bull market of the 1990s made you a rich man, and you were able to retire early and live the good life. But you lost half your portfolio in the 2000 downturn, and you don't know what to do.
You're horrified you may run out of money that you thought would last a lifetime. What are the best strategies for getting back into control?
In response to a reader's question, Frank Armstrong, a certified financial planner in Miami and president of Investor Solutions Inc., said you have to stop the avalanche in your account, and then overhaul your strategy so you can get back on track and avoid another disaster.
Ask the experts a question.
Question: I retired early in June 2000 at the age of 57-1/2. I had done very well in my 401(k) retirement plan. I chose to use the 72(t) rule of taking a series of substantially equal periodic payments for five years. At that time, I chose to take a withdrawal of 10 percent, which amounted to $7,333 monthly, before taxes.
At that time, I was told that with that percentage of withdrawal, my IRA should continue to grow. What a surprise I was in for! The stock market was on an unexpected dive. To date, I have lost about 50 percent of my retirement savings. As of this month, I will have withdrawn $66,000 from my account, plus incurred several hundred thousand in losses.
As you can probably guess by now, with the unexpected losses, and the continuing downward spiral of the stock market, I will run out of funds very early.
I am aware of a 10 percent penalty on the money already withdrawn (taxes were paid with each monthly distribution). My question is: Can I pay the 10 percent penalty on the amount of money already received and then lower the distribution amount to about half of what I am presently drawing? And then stick to that amount until my five years passes? Would there be any additional penalties imposed? I plan to move the account from my mutual fund handler to another plan provider so that I can have a much more diversified plan. I may also have a little more control of it. Thanks for any information.
Answer: I'm sure that this has been a very painful experience for you. But, you have lots of company. The last year was brutal for investors with poorly diversified accounts.
You have two problems. First, you need to stop the hemorrhage of assets from your IRA before you run dry. Then you need to overhaul your investment strategy to prevent a reoccurrence of the plan meltdown.
At your current withdrawal rate after your investment losses, you run a very high probability of liquidating your account. The requirement to take a fixed annual withdrawal on your reduced capital will rapidly deplete the account.
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U.S. stocks took a pounding in 2000, decimating many portfolios. | |
Unfortunately, the early withdrawal provisions you are using don't provide for much in the way of flexibility. Changing the withdrawal plan in midstream will subject you to penalties for past withdrawals. The trick is to avoid penalties on future withdrawals as well.
Seymour Goldberg, one of the country's leading experts on pensions, suggested an interesting way out. Take a lump sum withdrawal from your IRA then roll it over within the allowed 60-day window into another IRA. You will have to pay the 10 percent penalty on the past withdrawals. But, the new IRA ought not to be subject to the penalty on any new withdrawal plan. Of course, you will start a new five-year period for the withdrawal plan.
Goldberg indicated that the rollover would probably prevent the IRS from claiming that the series of payments were nothing more than a continuation of the old distributions. This result might not happen without a new IRA, or if you simply transferred the IRA via the "trustee-to-trustee" route.
Overhaul your investment strategy
A total overhaul of your investment strategy is in order. Investing during retirement is a completely different problem than investing during the accumulation phase. You cannot afford another disastrous decline. Your experience in the recent market slide points out the critical need to have very low portfolio volatility for any retirement plan during the withdrawal period.
You should consider your withdrawal needs for the next five-to-seven years, and fund those needs with a short term, high-quality bond portfolio. While this will reduce your expected return somewhat, the portfolio risk reduction should be quite gratifying. Once you have satisfied your need for liquidity and safety, the balance of your portfolio might be invested in a global equity portfolio.
Global diversification of your equity accounts will dramatically lower portfolio volatility without sacrificing long term return. Both academic research and long term experience would indicate that a properly diversified portfolio would return the maximum return per unit of risk.
Good luck. 
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