Dear Carrie: I freaked out in late 2008 and went fully into cash. I missed out on big losses, but I also missed out on gains. I have about $350K in cash in several 401(k)s. I'm 60, my job situation is very insecure, and I have a mortgage, kids and no pension. How can I preserve capital? -- A Reader
Dear Reader: I'm sure a lot of investors found the markets confusing -- and unsettling -- in 2008 and 2009. Your move into cash may have let you avoid part of the downturn (it's always nice when you manage to dodge part of a bear market), but as you seem to recognize, that defensive of a position is probably not the best for the long run. You are wise to be rethinking your strategy.
You say that your job is "insecure," but even so, you are very young to be focused exclusively on capital preservation. If you're in reasonable health, you could easily and hopefully live another 25 or 30 years -- or more -- and it will take some growth, not just preservation, to finance that.
So the real issue, as I see it, is how to help you survive a possible period of unemployment and stay prudently invested for growth. Here are some suggestions:
-- Put a year's worth of living expenses into something safe. It's vital you have a cash cushion -- an emergency fund -- to handle the worst-case scenario of losing your job. So, earmark a year's worth of living expenses in your 401(k) and park it in a money fund or in a series of CDs (for example, with three-month, six-month, nine-month and 12-month maturities).
Because you've reached the age of 59 1/2, you can tap your 401(k) in an emergency without having to pay a 10 percent penalty. However, you will owe taxes on any distributions. So unless and until you need it, leave that money in your 401(k), safe and growing tax-free.
-- Cut expenses now. Your short-term reality is that you might have to live without a paycheck for a while, so start preparing by cutting your expenses now. Every household can find ways to economize, and the money you save should go into your emergency fund. An ideal outcome would be that you save enough money so that you won't have to dip into your 401(k) at all.
-- Keep funding your 401(k). I recommend continuing to fund your 401(k) at work if possible, at least up to the level of a company match. Otherwise, you are walking away from free money and possibly further jeopardizing your eventual retirement.
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