Q: I am 63 years old and thinking of retirement. However, I have lost so much since August 2011. Would it be better to just pull my funds out of my 401(k) and keep the cash in a savings account at a credit union? I realize there would be taxes to pay, but what is the difference? Pay tax or lose by Wall Street!
A: You are not alone in fearing losses from your retirement account.
You may want to be sure you have a certain amount of funds that are not subject to the ups and downs of the stock market. However, also consider that, if you are in good health, you need your savings to still grow, so that it can keep pace with inflation. You could live in retirement for another 20-25 years.
Consult a financial advisor who can help guide you on the best way to protect your savings as you enter into retirement. You can find a fee-only financial advisor by going to The National Association of Personal Financial Advisors website.
You might also consider putting some of your retirement savings in two types of inflation-indexed securities offered by the U.S. Treasury. They are Treasury Inflation-Protected Securities (TIPS) and I Bonds. Both of these types of securities were created for investors who want inflation protection and a guaranteed rate of return on their principal. You can buy TIPS and I Bonds from financial institutions and on the TreasuryDirect website.
With TIPS, the principal and interest payments are adjusted to compensate for changes in inflation. Interest is paid semiannually and is calculated using the adjusted principal amount.
The earnings rate on an I Bond is a combination of a fixed interest rate plus the rate of inflation. The I Bond is an accrual-type security, meaning interest is added to the bond monthly and paid when the bond is cashed. With an I Bond you can defer federal taxes on earnings for up to 30 years. The bonds are also exempt from state and local income taxes.
Also just so you know, as of January 1, 2012, paper savings bonds will no longer be sold at financial institutions.