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Retirement plan advice: Stay the course

Boston – Veteran financial adviser Ed Slott has a stern warning for solo and small-firm lawyers who are panicking about their retirement investments: Stop watching CNBC.

“I tell the attorneys, ‘You can’t watch the Dow every day. Instead of watching that and getting [agitated] spend the time helping clients and making money doing it.’”

As the owner of a small business himself in Rockville Centre, N.Y., Slott feels his small-business clients’ pain.

“My own retirement plan has got hit plenty,” he says. “But I’m not going to stop putting money in.”

With stock prices falling faster than a judge’s gavel, many solo and small-firm lawyers are worried whether they’ll have enough retirement income to live on comfortably.

Their first impulse may be to try to stop the bleeding by selling all the stocks in their portfolios.

That’s a mistake, according to Luke Novak, a lawyer and vice president with Rothschild Investment Corp. in Chicago: “Everybody wants to sell. The problem is the right time to sell was September of last year.”

Thomas Haunty, a senior partner with North Star Resource Group in Madison, Wis. and author of “Real Life Financial Planning for Young Lawyers,” agrees: “I can guarantee you if you jump off the roller coaster now, you’re going to kill yourself.”

Haunty reassures attorney-clients that the market will eventually rebound.

“Every single crisis we have had has worked out to an upswing market,” he notes, citing a recent study showing that the S&P 500 Index has tended to rebound quickly after bottoming out during the past 10 recessions.

Re-balancing Acts

Most solo and small-firm lawyers have some type of retirement plan, according to Haunty, including:

  • Individual Retirement Accounts (IRAs);
  • SIMPLE-IRA plans. These are funded by employee deferrals and employer contributions. Employees can contribute up to $10,500 in salary deferrals, or $13,000 if they are age 50 or older.
  • SEP-IRAs (Simplified Employee Pension Plans). These are funded solely by employer contributions. Participants are allowed up to $46,000 in tax-deductible contributions for 2008; and
  • Self-employed 401(k)s. This plan is for solo lawyers with no employees other than a spouse. It allows tax deductible salary deferrals and profit-sharing contributions up to $46,000 ($51,000 if age 50) or older for 2008.

The ABA Retirement Funds program offers 401(k) and profit-sharing plans for ABA members. Most of the program’s 43,000 members are solo and small-firm lawyers. (The $4.1-billion program recently named Northern Trust in Chicago to provide investment services as of mid-2009.) Experts suggest setting an asset allocation (a mix of equities, bonds and cash) based on your risk tolerance, expected retirement range and other personal factors.

For example, the portfolio may be heavier in stocks for a younger lawyer, then edge more towards bonds and cash as the lawyer’s retirement date nears.

Then, review and re-balance your asset allocation plan periodically, especially during volatile markets. (Stock market declines can skew the asset allocation mix.)

Harry L. Hathaway, president of the ABA Retirement Funds, says he reminds anxious attorneys to focus on their long-term financial plan, rather than the current financial news.

“If your objective is retirement, don’t react to the headlines. Stay with the financial plan that’s been developed,” he says. “Don’t give up now.”

As for how long it will take the stock market to bounce back, the financial experts – along with the rest of us – are hoping for a quick recovery.

“Hopefully, it will be sooner rather than later,” Novak says. “But I guarantee if you pull out of the market and put your money in cash, you’re never going to get it back because you have no opportunity to participate in the upside.”

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