401K funds out of stocks and into WHAT??

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A divorced friend plans to move her 401K funds out of the stock market and asked me what would be the safest place. I need some input from someone who understands such things.

-- Sylvia (in Miss'ippi) (bluebirdms@aol.com), June 20, 1999



Most 401K plans have a family of funds some more risky than others. My 401K is thru CIGNA, they offer several stock funds like Fidelity Magellan, Warburg Emerging Growth, A S&P 500 Index Fund and other stock mutual funds. My CIGNA 401k also offers a Long Term Guarranteed Income Fund and a short term money market fund. The Long Term Fund "guarrantees" the fixed interest percent that does not change during the year; the long term fund invests in mortgages and real estate investment trusts. The short term rates flucuate some based on market conditions. Both the long term and the short term income funds are not invested in stocks so the principal (your investment) does not rise or fall like it would with stocks. So one of these income funds would be better in a market decline then stocks.

The long term pays today a higher interest rate but could be subject to a loss of principal in a depressionary market collapse accompanied by massive default by creditors.

Another option is a loan from your 401K to yourself. To avoid paying the 10% early withdrawal penalty and income tax on a withdrawal, most 401K plans allow the owner to borrow money from his fund and pay the fund back with interest. The neat thing is the interest payments are credited to your account so you essentailly are loaning your own money to yourself and there is no tax or early withdrawal fee. I believe it is the IRS that limits loans to 50% of the current vested value in the 401K and limits the number of outstanding loans to no more than two at any time.

I hope this helps.

-- Bill P (porterwn@one.net), June 20, 1999.


there is another thread on this asked by Jill. Take a look and follow my advice there. good luck.

-- Andy (2000EOD@prodigy.net), June 20, 1999.

Silvia: Bill P.'s nice answer omitted one thing worthy of consideration: Y2K! Given that this is a Y2K FORUM, we probably should at least entertain the notion that maybe come year 2000, all electronic money will essentially be vaporized. Or even bank runs THIS YEAR due to people just being WORRIED about Y2K might also have a nasty effect -- especially on the stock market and, obviously, 401k plans.

-- King of Spain (madrid@aol.com), June 20, 1999.

What you do depends on your assessment of the likeliest outcome to Y2K. Here in the Great White North, to take money out of RRSP's (our equivalent to 401k) will cost mega in taxes, which they withhold immediately. In our case, ~40%. So we moved out of the market into bonds, which *normally* do the opposite of what the market does. Of course, Y2K is not a normal situation - so it's a gamble, any way you go. I personally would prefer to take the bite and withdraw the cash (lots I'd like to do with it!), but my DH thinks 2-5 not 5-7 and is NOT in favour of that move. I didn't oppose him too vigourously because 40% is a lot to make back, and we'll have our basics covered without it.

Your friend needs to talk to a good financial advisor - my friend's advisor told her, "I don't think Y2K is going to be that big a deal; but if you want to avoid a crash, these are your options ..." Someone with a clear picture of your friend's overall financial picture, a willingness to follow her desires and a knowledge of the laws and regulations will give better advice than any here, IMHO.

Best of luck to you both.

-- Tricia the Canuck (tricia_canuck@hotmail.com), June 21, 1999.

Cashed mine out and happily payed the penalty, sold all my stock, cashed my savings bonds as well, cashed out of every 'bank product', credit union, etc. back in 1997 when I first became Y2K aware. Bought durable goods, such as having a well dug and woodstove purchased. Also stocked up on storage food & regular grocery items. As the old saying goes "a bird in the hand is worth two in the bush". Lost interest & income? Yep. Do I care? Nope. Rather keep warm with a nice cup of hot chocolate made with water from our own well if y2k hits with a bang. I also am a believer that much will go wrong in large portions of the country, so consider that my advice is based on that. I got out early in order to avoid the panics and to ease the cash out of the 'stock market' and into the 'grocery market'! God bless.

-- Kendall Williams (eagled7@webzone.net), June 21, 1999.

In many ways, this is a very tough issue, because it obviously goes well beyond the "buy extra beans and rice" type advice. We are in many instances talking about a lot of money, even in some cases what amounts to a person's life savings. And the hit that you take if you cash out is obviously significant.

But it is, in fact, your life and your money. Consulting a "financial expert" is ludicrous with Y2K -- there are no experts equipped to deal with Y2K, it is well "outside the box" of any thinking that they have ever done.

The stakes are these:

1)cash out, taking a big hit in terms of taxes applied immediately and penalties exacted next year (maybe...), but then being able to use the money immediately to fund your Y2K preps (maybe even re-locate if you need to). Additionally, you now can protect your money to the maximum extent, by converting it to cash, gold, silver, which you take complete and total possession of. The benefit is that you have maximum protection.

2) Keep your 401k "in the system", but look into ways to minimize its loss due to a stock market crash, etc. (This may include taking out a loan against it, which you can immediatey proceed to do many of the steps in 1).)

The risks are yours. Only you can decide.

-- King of Spain (madrid@aol.com), June 21, 1999.

A word of caution about taking a loan against 401K. If you take a loan(up to 50%)you will have access to your money without paying the high taxes associated with withdrawal. What they forget to remind you is that "if for any reason your loose(give up) your job, your loan becomes immediately due!" In other words, if you can't pay back your loan immediately, they will liquidate your holdings. and pay off the loan. The reason that they only let you borrow up to 50% is that the first 39% will go to federal and state taxes as an immidiate gain(pay type gain) and an additional 10% will go to the penalty for early withdrawal. This will push almost everybody into a higher tax bracket which will include even more taxes. In the end you only end up with about 50% of your money if your 401K covers the loan. If it doesn't they will come after you.

Best advise that I have: first find out who is administering the plan. Have they completed their y2k repairs? Find out who is running the garenteed investment fund? IF the garenteed investment fund is secure then park your money there. The money is not garenteed by the government like a CD but to date no one has lost money in these funds. If you are very Brave, you can park your investment into the garenteed investment and as soon as the stock market drops 20-30%, move your money back into the s&P500 fund. The big companies will survive and you will have bought their companies at a low point in history when you look back.

My 401k mix:(not for everyone) My Company stock=40%(I know it will survive), S&P500=30%, Canada fund=25%, Bonds=5% My regular portfolio: Company Stock=55%, Stock and Bonds mix=27%, cash=$35000

Whatever you choose make sure you can sleep well at night. That is the only criteria for me. Sure I may loose some money in the short term but after that, it will do great.

Good luck

-- Ned P Zimmer (ned@nednet.com), June 21, 1999.

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