Deschutes 401(k) Advisor
Sensible Solutions for Retirement Planning

1Q 2002

How to Bounce Back! If your 401(k) account has suffered right along with the U.S. economy, then recent comments by Federal Reserve Chairman Alan Greenspan are a breath of fresh air. According to Mr. Greenspan, the latest recession is apparently over, even if the size and shape of the recovery are not certain. With an economic recovery on the horizon, there is no better time to take a good hard look at your retirement portfolio. Now is the time to get back on track, especially if the events of the last year or so have scared you off the path towards a sufficient nest egg. Assess the Damage The S&P 500 Index of large US Stocks was down 9% in 2000 and almost 12% in 2001 with small company stocks suffering even greater losses. It may seem overwhelming at first glance, but even if you were invested 100% in the S&P 500 Index during that time and lost 20% of your account value, it may not take as long as you think to recoup your losses. As the chart below illustrates, if you lost 20% of your account value, yet continued to save $125 per month (5% of a $30,000 salary) and earned a moderate 8% annual return going forward, it would take you just under 4 years to get back to where you started. Not ideal, but perhaps not as bad as you expected. Furthermore, if you keep saving, as illustrated below, you could still end up with a decent nest egg.

Now Go Back to the Drawing Board

The good news is that the rules haven’t really changed. Diversification is still the rule. Many 401(k) participants don’t know how to diversify their investments and, as a result, have inappropriate allocations for their age and risk tolerance. Don’t make this common mistake. Sign up for the educational sessions offered through your 401(k) program and ask for advice if you are not sure what to do. (See our Current Recommendations below.)

You May Need to Save More

As we outlined last quarter, many experts believe we will see stock market returns around 7-8% annualized over the next 5 years, with bond returns in the 4-5% range. This means we may all have to save more to reach our retirement goals. Luckily, the Tax Relief Act effective January 1, 2002, allows us to do just that. Keep reading for suggestions on how to recoup your losses.

Getting Your Ducks in a Row...Your 2002 Game Plan

Do you remember what your New Year’s Resolutions were three months into the New Year? Did you resolve to get to the gym more? Get your financial house in order? We can’t help you with that extra 10 pounds, but we can give you some suggestions to get in better financial shape.

Revisit Your Savings Goals

When do you plan to retire? How much money will you need to live comfortably? Are you saving for your child’s college education? Will you be borrowing from your 401(k) account to buy a house? Have you requested a personal benefit statement from the Social Security Adminstration to estimate how much you can expect to receive? If you answered “I don’t know” to any of these questions, it’s probably time to give it some thought. Visit our Planning Calculators on this web site.

Increase Your 401(k) Deferral Percentage

If you discover you need to save more, the Tax Relief Act of 2001 will help you do just that. For the year 2002, you can defer up to $11,000. This limit will be increased by $1,000 per year topping out at $15,000 in 2006. Furthermore, the percentage of pay limit that often impacts lower-income workers has been eliminated. (Total contributions between you and your employer used to be limited to 25% of your pay--they can now total up to 100% of your pay.)

If You are Over Age 50, Make a “Catch-Up” Contribution

If you are age 50 or over, you can make a “catch-up” contribution of up to $1,000 in 2002. This “catch-up” contribution limit will go up by $1,000 per year until it reaches $5,000 in 2006.

Take a Tax Credit When You File Your 2002 Taxes

If you earn less than $25,000 annually (or $50,000 as a couple filing jointly), you will be eligible for a tax credit between 10-50% on the first $2,000 you contribute to your 401(k) plan. This credit is available for the 2002, 2003, 2004, 2005, and 2006 tax years. Make a note to yourself now to remember this next year when you file your 2002 income taxes.

Lower Your Debt and Pay Yourself Instead

The average U.S. household has at least one credit card with an average balance of over $8,500! (according to www.cardweb.com). Did you realize that if you have a card with a $2,000 balance and make a minimum payment of $50 per month, it will take you over 12 years to pay off your account and cost you over $2,000 in interest payments? This money could be going to your 401(k) account instead! Visit our planning calculators at www.deschutes401k.com for a handy debt reduction calculator that can help you determine the best strategy for paying off those cards. You’ll be glad you did.

Ask for Help if you Need It

You have access to a wide array of financial resources through your company retirement plan. Visit your plan web site, attend your company 401(k) meetings, and take advantage of the support and advice you can get there.

The bottom line is plan, execute, and track your progress. With persistence and regular attention, you can be in good shape during the second half of the game.

How Confident Are You?

A recent survey on retirement confidence by the Employee Benefits Research Institute revealed:

• 67% of employees have saved something for retirement
• However, 32% have never calculated how much they should be saving
• 72% feel they have done a good job at preparing financially for retirement
• And, 70% are confident they will have enough money to live comfortable through their retirement years.

How confident do you feel about your ability to support yourself comfortably in retirement? The reality is that even though most of us think we’ll be OK during retirement, many have never actually taken the time to figure out how much we will even need.

The Social Security Administration has projected that for most Americans, Social Security benefits will cover only about 40% of our living expenses in retirement. This means that the remaining 60% will need to come from you.

Saving in a 401(k) plan is the right start. If you are part of the 32% who don’t know how much you need to save, visit the planning calculators and get on track for retirement.

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)

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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