Deschutes 401(k) Advisor
Sensible Solutions for Retirement Planning

3Q 2002

10 Things to Do with Your 401(k) Now

1. Don’t completely abandon your stock funds.

Maybe the bear market has shown you that you’re more conservative than you thought. If so, reallocate and increase your holdings in bonds and money market funds. Remember, stocks have historically offered the best returns long-term and if you sell out at the bottom, you eliminate your chance of getting anything back.

3. Don’t try to make up for past losses with more risk now.

This is most important if you are close to retirement. More losses now could only compound the depletion of your nest egg just when you need it most.

4. Review your asset allocation.

As we say ad nauseam, diversification remains the key. Take a look at our recommended allocations on page 3 and compare them to your actual account. Additionally, your plan web site has allocation models customized to your plan’s funds. If you still aren’t sure what to do, call and talk to a Deschutes representative or see your Benefits Representative to request an educational booklet.

5. Review your funds. Once you have your asset allocation in line, take a look at your individual funds. If your plan offers three large cap stock funds and you are only invested in one, you may need to take a look at what you are missing. Fund managers utilize different styles of investing including growth, value, and index investing. These differing styles of investing perform differently under various market conditions. What this means is that you can achieve better diversification by spreading your stock investments over more than one style. For example, value funds have generally performed better than growth funds in the current bear market. Investors who spread their assets among these styles have lost less than pure growth investors. For more information on the investing styles of the stock funds available in your plan, visit your plan web site.

6. Better yet, opt for a model portfolio.

The simplest, most comprehensive choice for your 401(k) savings is a model portfolio. The model portfolios in your plan are designed to be a single investment choice rather than just one of the funds in your allocation. Short-Term/Conservative portfolios are generally recommended for people who are nearing retirement or are very uncomfortable with risk. Moderate portfolios are good for most investors who have at least 3 years until retirement, and Long-Term/Aggressive portfolios are only recommended for long-term investors (10 years or more until retirement) who are also comfortable with higher risk.

7. Recalculate your savings needs.

Our current estimates for future returns are 7-8% annually for large company stocks, 9-12% for small company stocks, 5-6% for bonds, and 2-3% for money markets. If your retirement savings projections have been based on higher future returns, then you may need to go back to the drawing board and recalculate how much you need to save. Visit the Planning Calculators on your plan web site to determine if you are saving enough.

8. Don’t borrow from your 401(k) plan unless you have to.

It sounds like a good deal but, remember, when you borrow from your 401(k) plan you are withdrawing pre-tax money and when you pay back the loan you do so with after-tax dollars. This causes you to lose the tax benefits you gained by participating (see Tax Advantages on page 1). The reality is if you are in a 24% tax bracket, it will cost you $1.24 for every $1.00 you pay back on your loan. Another potential drawback to 401(k) plan loans is that often you must repay the loan if you leave your job, which could be the worst possible time to come up with a lump sum payment.

9. Re-configure your retirement budget. You may have to face up to living on less in retirement than when you were working. That may be OK if you are normally frugal and don’t have large scale (and expensive) retirement plans, like extensive travel. Now might be a good time to take a look at what is really important to you and plan accordingly.

10. Save more if you can. Giving up the $3 latte at Starbucks every day might seem like deprivation, but doing so could add up to an extra $74 in your 401(k) plan each month. Remember, you buy the latte after-tax but that same $3 deferred before-tax will actually put $3.72 into your 401(k) plan. If that $74 per month earns 8% for 15 years, you could have an additional $19,000 at retirement! If your morning java is too precious to give up, find somewhere else you can slash $3 per day. This example is based on a 24% tax rate and 3% inflation. You may not be able to take charge of the stock market, but getting a good handle on your saving and investing plans can offer some comfort as we wait for an eventual turn around in the financial markets.

Market Update and Outlook

The stock market continues to frustrate investors as we head into the final quarter of 2002. Since facing a severe decline in the month of July, the market has advanced only modestly, and seems to lack the conviction required for a strong comeback.

One piece of good news, however, is that stocks are no longer expensive, according to the Federal Reserve Model. The Federal Reserve Model is based upon a comparison of S&P 500 Index earnings with the interest rates of 10-year government bonds. This model currently suggests that stocks, in fact, are now undervalued by approximately 35%. In contrast, at the bull market’s high point in late 1999 to early 2000, this model suggested that stocks were overvalued by more than 60%.

The second piece of good news is that we are now entering a time of year when stocks generally begin to perform better. September and October are historically the worst months for the stock market each year. Once we advance past these typically difficult months, stocks generally begin to perform better. We hope this year will be no exception.

Lastly, we are also entering the 2nd half of the current Presidential cycle, historically a positive period for stocks. We enter this phase in November 2002 and it continues until the November 2004 elections. This political influence could have a positive effect on the financial markets.

We believe, as many analysts do, that an economic upturn is just around the corner. Once the economy picks up, the forecast going forward should be for much better returns.

Diversification remains the key...

Our current recommended models are shown to the right. Visit your plan web site at www.deschutes401k.com for model portfolios customized to the funds available in your 401(k) plan.

If you would like assistance from a Deschutes financial advisor, notify your Benefits Representative or call (503) 223-2500, toll-free (800) 566-2323.

If you are unsure about your own asset allocation strategy, please visit the Planning Calculators at your plan web site to find on-line tools or request asset allocation advice.

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, George Battistel, Ph.D., Dan Sholian, Jim Titus, Dennis Munsey, Diane Bella

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