5 Strategies for Protecting Your 401(k) Savings

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Weighing your options when it comes to your portfolio

This article was originally posted at Len Penzo dot Com and we thought it gave a good perspective of how and why one person started buying precious metals as part of his portfolio. We’re not financial advisers, we just want you to choose what’s best for you.

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Judging from my email, more and more of you are becoming interested in protecting your wealth — and I’m happy to see it. Last week, one of my loyal readers, Jen from Virginia, asked:

Should I focus on contributing as much to my 401(k) retirement plan as possible, or allocate some of it to buy precious metals, and if so, how much?

Unfortunately, there is no one-size-fits-all answer; how you allocate your retirement savings is entirely up to you and nobody else.

That being said, I no longer contribute any money to my 401(k) plan. That’s right; not a penny.

It’s a decision that didn’t come lightly.

After faithfully contributing to my 401(k) retirement plan for many years, I finally found the courage in 2011 to limit my 401(k) contributions to only take advantage of the full company match and use the residual cash to purchase wealth insurance in the form of physical gold and silver.

Eventually, I concluded that the risk of a US dollar collapse was significantly greater than the added benefit I was getting from my company’s 401(k) match, so I stopped contributing entirely. Since then, all of my nest egg contributions have gone towards the purchase of precious metals.

Is that radical? Absolutely.

Frankly, in a properly-functioning financial world, I would never make such a move. However, times have changed. The Fed’s reckless monetary policies — persistent near-zero interest rates and quantitative easing — have distorted the financial system so badly that conventional wisdom regarding strategic management of personal finances has been turned on its head.

If I thought the risk of a US dollar collapse occurring before I reached retirement age was only, say, 50% or less — then I would still be contributing to my 401(k) plan to at least catch the company match. However, that’s not the case anymore; I believe the probability a dollar collapse before the end of this decade is now closer to 95%.

Again, that’s my assessment. You must draw your own conclusions.

Buying Wealth Insurance

So, how much physical gold and silver is required to protect the hard-earned wealth that’s locked-up in your 401(k) retirement plan?

In his new book The Death of Money, author James Rickards notes that:

A useful way to think about (precious metal’s) insurance function is that a 500% return on 20% of a portfolio provides a 100% portfolio hedge.

I know what you’re thinking: What the heck does that mean?

If James is correct — and I believe he is — it means that you can fully protect the wealth that’s currently locked in your 401(k) plan by keeping precious metals in your possession equivalent to 20% of your total nest egg. Here’s a slightly over-simplified example:

Let’s say you have a $50,000 nest egg: $40,000 in your 401(k) and $10,000 in physical gold and/or silver. In this case, $10,000 in precious metals represents 20% of your total savings.

Now let’s say the dollar collapses and its value essentially falls to zero. If that happens, worst-case, the $40,000 in your 401(k) would be:

$40,000 x 0 = $0

Rickards (and many others) estimate that if the dollar tanks, the value of precious metals in your possession will increase five times (500%). I think that’s extremely conservative — but let’s stick with the conventional wisdom of five times. If that’s true, then the $10,000 held in precious metals would now be worth:

$10,000 x 5 = $50,000

Do you see what happened? Although your 401(k) was completely wiped out, the post-collapse value of your physical gold (and/or silver) soared to $50,000! In other words, the dollar became worthless, but the purchasing power of your nest egg remained unchanged — and that is how a portfolio protected with precious metals acts as wealth insurance.

Protection Strategies

If you’re considering a little wealth insurance to protect the retirement nest egg you’ve currently got locked up in your 401(k), there are multiple options to consider, depending upon your tolerance for early withdrawal penalties and your confidence in the on-going viability US dollar. Assuming your goal is to achieve a 20% portfolio allocation in precious metals, here are five potential ways to get there:

1. If you’re certain collapse is imminent, you could pull 20% from your 401(k) immediately, take the tax and penalty hit for early withdrawal, and then buy precious metals with the remaining proceeds. Then again, if you were that certain of collapse, you’d probably want to pull all your money out of your 401(k) and just replace it with physical precious metals.

2. If you believe a collapse is probable, but not imminent, you could temporarily stop your 401(k) contributions until you acquire enough precious metals to make up 20% of your portfolio. Then, resume allocating 80% of your savings to the 401(k) and 20% to physical precious metals.

3. If you believe a collapse is possible, but more than several years away, you could contribute only enough to your 401(k) to get the company match — and use additional funds to buy precious metals a bit more gradually, until 20% of your nest egg consists of precious metals.

4. If you think collapse is a long shot, but still want insurance — just in case — you could continue maximizing your 401(k) contributions and only purchase precious metals whenever you find a little extra spending money.

5. You could borrow from your 401(k) and use the proceeds to buy physical precious metals — if possible, equivalent to 20% of your total retirement nest egg. Yes, if you lose your job you’d have to pay back the loan within a short time frame in order to avoid withdrawal penalties and taxes. However, since the proceeds are only being used to exchange fiat dollars for real money, paying back the loan shouldn’t be difficult.

Of course, you could also pass on wealth insurance altogether — essentially betting on a strong US dollar, healthy world financial system, and the ability of the powers-that-be to continue holding things together far into the future. But that’s for you to decide.

How will you know which path is the right one for you? The only sure way to tell is by observing how well you sleep at night after making your decision.

As for me … I sleep like a baby.

Investing in Gold: A Q&A session with APMEX Director of VIP Services, Peter LaTona

We recently have been hosting a series of Q&A sessions on Facebook and Twitter for our fans and followers to partake in. Previous topics that we have covered were about Investing in Silver and Investing in a Precious Metals IRA.  For this Q&A session, Peter helped answer questions about Investing in Gold. Here below is a recap of that session.

If you like to join us on our upcoming Q&A sessions, make sure you like us on Facebook and follow us on Twitter. We look forward to answering your questions.

Q- Does APMEX utilize any hedging strategies? If so why do their premiums remain so high?

A- APMEX hedges 24/7 when the Precious Metals markets are open.  (Markets close at 5PM Friday ET and reopen on Sunday at 6PM ET). Hedging allows us to lock in prices at the time you place your order. All Precious Metals dealers have experienced unprecedented demand as of late, which has drastically cut into available products. The manufacturers had no way of anticipating this sudden increase in demand. When supplies are low and demand is high, they charge more for their products. APMEX pays more to purchase the products, so premiums go up. APMEX is also paying higher prices to our customers who wish to sell their products to us. It does work both ways.

Q- Do you see a split coming in the way paper and physical Gold and Silver are priced?

A- The paper products (ETFs) claim they correlate to the actual spot prices of the metals. However, the recent drop in spot prices demonstrated that this is not always true. The paper products fell even more than the spot prices. Jim Cramer has always recommended Gold through GLD…He now says buy the physical coins. I do not see how there could ever be a split in how they are priced. They are both based on spot prices.

Q- In your opinion, why has gold dropped so much?

A- Most of what I read says gold dropped because of the paper markets (ETFs). (Speculators) The big hedge funds, who always leverage their purchases, started taking money off the table.  As prices dropped, automatic sell signals hit computers and a snowball effect took place. At the same time, the physical market (Investors) bought at levels we had never seen before.  There is a re-balancing between investors and speculators. The basic reasons for owning Gold as an investment would seem more valid than ever….as a long term investment

Q- Do you see Precious Metals reacting to the over flooded market of Gold and Silver certificates? Do you believe the Silver incident is coming?

A- I do not know if the certificate market is big enough to move the overall market. If you are referring to ETFs, then yes, they definitely move markets. I am not sure what you mean by Silver incident, but I am not seeing anyone predict an explosive move up or down.

Q- Taking into account Gold’s recent volatility and the current economic environment, what are your thoughts as to where Gold is headed in the short/mid-term?

A- I only think of Gold as a long term investment strategy. Many analysts advise that a 4-12% insurance policy should be considered by all. I am not aware of anyone who consistently predicts short term prices with accuracy. Short term becomes more of a bet than an investment.

Q- My local coin dealer says don’t go for 90% junk. Rather go for bouillon bars and rounds. Thoughts?

A- Our customers who believe there could be a time they need real money to buy food, often buy 90%. If purely for investment purposes, I would not disagree with your dealer. Keep it simple and buy 1 oz. coins, rounds or bars.

Q- It reminds me of what happened to Silver a few years ago when it dropped from like $30 to $10 but yet you couldn’t find any physical Silver at $10.

A- Yes, similar for sure. It is not that Gold and Silver are in short supply. The problem is that the manufacturers who make products cannot keep up with demand.

Q- Peter, personal question. What is your personal favorite product, round, bullion and manufacturer?

A- I like the simple Gold & American Eagles. It is just a personal choice, many of my colleagues like Maple Leaf, rounds or bars. If you want rounds I would go APMEX rounds because most of the time they are the best price. They are made by the Sunshine Mint. For bars, I personally like the Pamp Suisse in assay.

Q- Why did the mint suspend production of the 1/10th oz Gold round?

A- I do not know, but I am fairly sure the reason was they were struggling to keep up with production of 1oz. coins

Q- Is there a shortage in physical Silver? I still see people selling plenty of Silver.

A- It is not that there is a shortage of Silver; there is a shortage of Silver products. The manufacturers did not anticipate the buying frenzy. They are struggling to catch up to demand.

Q- Exactly how does the paper futures market effect the Precious Metals market and how much can the price be manipulated through the futures market?

A- This is not an area of expertise for me, but I think of it like this. The future markets allow speculators to place leveraged bets on whether prices are going up or down. Other speculators can monitor the direction of the bets and either jump on board or play the opposite view. The reason it can really move markets is that they control much more Gold or Silver than they actually had to pay for. It is a leverage bet. I might buy a Gold contact at 100 oz. but I only have to put 10% down. The market reacts as if 100 oz. has been sold. Hope this helps.

Q- If APMEX hedges when they make their sale instead of when you purchase from your suppliers, aren’t you basically helping to drive down prices after you have sold your product?

A- it is actually the opposite. If we sell 100 oz. of Gold we buy a futures contract.  If we buy 100 oz of Gold we sell a futures contract. Our goal is to stay neutral.