Untitled Document

PERSI report
'Don't derail your retirement'

The following appears in the latest PERSI report for state employees
Sticking with your retirement savings goal in turbulent times can be challenging. Everyone who has a retirement savings account has been affected by the downturn in the global economy. If you feel anxious, you’re not alone. There are three steps you can take to maintain your focus: 1) continue saving money for your future; 2) reduce your taxes by investing in a tax-deferred account; and 3) look to long-term investing for greater growth potential. This article will help you understand some of the commonly used strategies for staying focused on your retirement goals.

Continue Saving
These days many people are frightened by the decline in value of their retirement accounts. Financial experts almost unanimously agree the worst move you can make is to stop saving. If you save nothing, you’ll have nothing. So rather than stop saving during these difficult times, a better strategy is to change your investment choices. This is called asset allocation.

If your money has been invested in aggressive funds in the past, which probably meant you earned higher returns, it may be time to consider the more conservative investment options available to you. If you are invested in the Choice 401(k) Plan, you can get fact sheets on every investment option by visiting the PERSI Web site at www.persi.idaho.gov. If you scroll down to the bottom of the Choice Plan page, you will find a Choice 401(k) Plan Investment Options link. You can change your investment choices quickly and easily online. Regardless of the country’s economic situation, you should review and evaluate your investments annually.

Reducing Taxes
Just like it’s important to minimize your investment fees and expenses, it is also important to invest to reduce your taxes. Saving for retirement in a tax-deferred account, such as the Choice 401 (k) Plan, means you not only reduce your taxes now, but also don’t pay federal income taxes until you take money out of the account rather than during the time money is being invested.

Plus, the earnings on your investments are also tax deferred as long as they remain invested. Since your earnings are reinvested and nothing is taken out to pay taxes, you’ve got more money to compound and grow. This means when you withdraw the funds, your retirement investment may be larger than a similar investment that was subject to annual capital gains tax. And, since you are investing for retirement you are more likely to be in a lower tax bracket when you finally withdraw the money than you are today.

Long-Term Investing
Now that you’ve committed to continue saving and you’re investing in a tax-deferred retirement account, the next step is to understand how to manage your investments over the long term. As stated earlier, start by evaluating your asset allocation to find the right balance between risk and return. Before the market downturn, you may have been investing in higher risk, higher return investments. Today, you may want to reallocate your funds to more conservative, less risky options. Some call this “fixing the mix.” Your money will still work for you, but you won’t see the returns you enjoyed just a year ago. Before fixing the mix, you should understand a common investing practice called “dollar cost averaging” (DCA).

This is a technique designed to reduce market risk by systematically investing a fixed dollar amount at regular intervals. Many investors already practice DCA without realizing it. Using DCA, more shares are purchased when prices are low and fewer shares are bought when prices are high. Regardless of your investment mix, you are practicing DCA if you contribute money on a regular basis to a retirement account and purchase more shares at a lower cost while prices are down.

The expectation is that when the market rebounds, prices will rise and you will make money. If you’ve ever planted a garden, you did more than sow the seeds. You made a commitment to water, fertilize and weed. Investing for retirement is similar. It requires more than a commitment to saving. It also requires constant attention to changing conditions, and occasionally some action on your part to ensure you reach your retirement goals.