Deschutes 401(k) Advisor
Sensible Solutions for Retirement Planning

3Q 2001

Hang on tight!

Despite lots of speculation about an economic and financial market recovery, the major market indices have been revisiting their spring 2000 lows as the 3rd quarter nears an end. The recent terrorist tragedies in New York and Washington have only added to the market’s volatility as well as greatly altering our frame of mind and quite possibly the way we live.

As a 401(k) investor, you’ve no doubt heard dozens of times to think long term if you have more than a few years remaining until you retire. That does sound good, but by now you’re asking yourself how much lower can the market go, how long will this downturn last, and when can I expect a rebound?

The problem is that most of us (without a Ph.D. in Economics and 12 hours a day to use it) have no way to predict when the economy and financial markets will recover. Furthermore, in a bear market (as in life), knowing the right thing to do and actually doing it can be two different things.

So as you sit there and debate whether you should stick to your guns or sell everything and keep your money under your bed (not good), take comfort that evidence does indeed suggest that the worst thing a long-term investor could do right now is move to cash (or some other conservative investment) and then try to time the market’s recovery.

According to data from Ibbotson Associates, if you put $1 in the S&P 500 back in 1980 and left it there until December 31, 2000, that $1 would have grown to $18.41. But, if you had missed the best 15 months of that same 240-month time period, you would have a whopping $4.73. If you had left the money invested in Treasury Bills over the same time period, you would have only $3.61. The chart below illustrates the difference.

So even though we can’t predict when the “best” months (or years) will come, we can take a defensive position. Read on for our advice.

Take the defense...

1. Reassess your tolerance for risk.
You may have considered yourself an aggressive investor back when the market was going nowhere but up. Taking a risk assessment after experiencing a bear market will tell you how you really feel about risk. Use your plan’s on-line risk assess ment questionnaire at deschutes401k.com.

2. Diversify as best you can.
During a prolonged downturn, even an appropriately diversified portfolio is going to suffer a little. According to a recent study by the Employee Benefit Research Institute, most 401(k) participants made money last year, even though the S&P 500 closed down 9.1%. Participants who came out ahead can thank
diversification, continued saving (remember you are buying low in a down market), and employer contributions.

3. Rebalance your portfolio if needed.
60% of 401(k) participants have never made changes to their asset alloca- tion since their initial enrollment according to the Investment Company Institute. If this number includes you, your asset allocation may not be where it should, especially in light of recent market volatility. Compare your desired asset allocation with your actual 401(k) statement. If the percentages in each category don’t match, it’s time to re- balance.

4. Take a 401(k) vacation.
If you’ve assessed your risk tolerance, know you are well-diversified, and have rebal- anced, take a break. Breathe easy until the end of the next quarter when you should review your 401(k) statement, and do it all again.

Most importantly, hang on tight and, whatever you do, don’t stop saving. Your future depends on it.

Our Current Recommendations

The models below are our current recommendations for short-term/conservative, moderate, and long-term/agressive investors.

Short-Term Strategy
(0-3 years until retirement)
Moderate Strategy
(3-10 years until retirement)
Long-Term Strategy
(10+ years until retirement)


Uncle Sam Helps You Save More

With the reality of double digit stock market returns behind us for the forseeable future, most 401(k) participants are looking for ways to compensate so we can enjoy the retirements we’ve been planning so carefully for.

Luckily, our U.S. legislators recognized this need also and included some much
needed retirement plan reform in the new tax bill effective January 1, 2002.

Here’s a short recap of some of the items most relevant to 401(k) participants.
We’ll cover the bill in more detail in our 4th quarter newsletter.

1. Contribution limits will be higher.
Currently, you can save no more than $10,500 a year. The new bill will raise this limit to $11,000 beginning in 2002, and then $1,000 per year for the next four years, topping out at $15,000 in 2006.

2. Elimination of percentage of pay limit (which frequently impacts lower-income workers).
Currently employee and employer contributions combined cannot exceed 25% of your pay. The new rules eliminate this limit allowing the total (employee and employer) contributions to be up to 100% of your pay. The old rules prevented lower-income savers from making larger contribu- tions even if they could afford to.

3. Faster vesting.
Employers will now be required to vest you fully within 3 years on a cliff vesting plan(currently 5 years) and 6 years on a graduated vesting plan (currently 7 years). Your employer still has the discretion to shorten the vesting time.

4. Catch up contributions for those over age 50.
If you are over 50 you may make a “catch-up” contri- bution of up to $1,000 in 2002. The “catch-up” contri- bution limit will go up to $2,000 in 2003, and con tinue to go up by $1,000 , capping out at $5,000 in 2006. This “catch-up” contribution is in addition to the annual contribution limites described in item 1 (above).

5. Tax credit for low-income savers.
If you earn less than $25,000 annually (or $50,000 for a couple filing jointly) you will be eligible for a tax credit between 10-50% on the first $2,000 you contribution to your 401(k) plan. This credit will be available for the 2002, 2003, 2004, 2005, and 2006 tax years. This credit will be available to you when you file your 2002 tax returns.

The Deschutes 401(k) Advisor is a quarterly publication educating 401(k) plan participants on the current issues related to retirement planning and investing.

Deschutes Investment Advisors is an independent firm dedicated to developing optimal strategies for corporate retirement plans, endownment and foundations, and individual investors. We can be reached at 503.223.2500.

Editor: Katrina Bell
Editorial Committee: MacGregor Hall, Bryn Torkelson, Dan Sholian, Jim Titus, Dennis Munsey, Diane Bella, Karen Price

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