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 a Precious Metals IRA: A Q&A with APMEX Director of VIP Services Peter LaTona

On March 19th, 2013 we hosted a Q&A session on Facebook and Twitter with Pete LaTona, Director of VIP Services. Pete answered several questions about investing in a Precious Metals IRA. Below is a transcript. Please like us on Facebook page and follow our Twitter profile to participate in upcoming chats and let us know if you have any questions.

Q: Can you keep the metal in your possession?
A: This is one of most commonly asked questions about Precious Metals IRAs.The Precious Metals are stored in a depository. If you were to take possession of the metals it would be considered a withdrawal and you would owe taxes at that time. This works just like any IRA. When you take a withdrawal, then it is time to pay taxes.

Q: Do you foresee an increase in the price of Gold/Silver/Platinum for the far future?
A:
Everyone wants to know if prices are going up, but no one really knows for sure. If a Precious Metals dealer shouts from the rooftops that prices are going up, then consider their motive. The man who runs the world’s largest hedge fund, Ray Dalio, says he does not know what prices will do, yet he believes in a 5% Gold allocation because of its value as a currency. Central banks became net buyers of Gold in 2010, and they just keep buying more. Gold has become a currency. Gold belongs in everyone’s portfolio who wants protection from all of the financial risks we face in today’s environment. How much (4-20%) depends on how much risk you think is out there.

Q: Why do you think the government will keep their promises regarding IRAs? See Cyprus, for example. IRAs are the major source of wealth for Americans. The tax deal is so good, that I can’t help but to think there will be some level of confiscation.
A:
I do not believe the government will change IRA rules because there are no more pensions in today’s world. The government has a vested interest in people being able to take care of themselves, at least to some extent. I do not believe confiscation will occur ever, but that is my opinion. The cost to send the Army door to door for confiscation would be much more than the amount of Gold they would find.

Q: Am I able to open an IRA through APMEX and deposit funds whenever? Or is there a defined plan?
A: There are defined plans. First, you choose your IRA custodian and then fund your account. Once the money is in your account, you call APMEX and we help you with your purchase.

Q: In your opinion, what is the number one reason to own physical Gold and Silver?
A:
The primary reason from a financial planner point of view is wealth protection through portfolio diversification. There are others, but that is probably number one by far. The six main categories of investors we find at APMEX are those who want to protect their money; those who want to make money; those who are skeptical of big business and governments; those who fear a major currency collapse and metals would be needed to buy bread; people who like to collect beautiful coins from around the world; new investors who just are waiting to make their first purchase.

Q: With the credit crises in Europe spreading and the slow uptick in the stock market here, how do you foresee the price of metals increasing in the next ten years?
A:
You are pointing out that the global economic concerns have only been given Band-Aids as politicians lack the will to make hard decisions. Most people would expect Gold prices to rise in such an environment. Central banks continue to trade paper assets for Gold. That alone should tell us something. Countries across the globe are printing money, and it is hard not to imagine inflation setting in sooner or later. Let’s just hope we never see hyperinflation. I met a man from Argentina several years ago who told me at one time during their hyperinflation when he woke up in the morning, it was as if someone had taken another zero out of his bank account.

Q: Do you think Silver will hit $50 an ounce sooner rather than later?
A:
Define sooner or later. I am not trying to avoid an answer, but timelines need to be clear. I believe the same economic uncertainty that could drive Gold prices up will take Silver along with it. I will tell you we have many sophisticated clients who would say sooner. We also need to keep in mind Silver industrial uses. It is a key component of solar panels. Silver has hit $50 before, so it would not be a shock to hit it again.

Q: Can the depository be at our home bank?
A:
It would depend on whether your bank is approved to handle IRA deposits. Most banks are not set up for this type of depository service.

Q: Would it be better to open a Precious Metals IRA or keep them on hand to help my children when they are older?
A:
If you have the funds outside of an IRA to buy what you want, I would use those funds outside of your IRA. Sometimes, most of the money you might have to invest is in an IRA.

Q: I collect Silver and store it myself. Is there a minimum amount required to take all of my Silver and turn it into an IRA?
A: If you have Silver in your possession already, you cannot create an IRA with the actual physical metal. An IRA is funded with cash, and then you buy the metals.

Q: I remember when 1 oz of Silver only cost me 5 dollars… how times have changed. Precious Metals will hit the moon soon…
A:
Silver seemed like it traded at $20 or below for forever. It has been trading in a range for some time the past year. Let’s see if a break out occurs. Also remember that Silver has become a key component in solar panels. If that industry really takes off…?

Q: Let’s say I requested to cash out today, when would the metals arrive in my hands?
A: Processing will vary by depository; most people cash out, but you can also take physical possession. My best guess is around 2 weeks, but you’ll have to check with your specific IRA custodian.

Q: How would you take delivery of the physical metals if you have them in a Precious Metals IRA?
A: Your depository will ship your metals to you, or you can choose to cash out your account.

Investing in a Precious Metals IRA: A Q&A with APMEX Director of VIP Services Peter LaTona