Americans advised to avoid personal retirement accounts

As details of personal retirement accounts have come out, we now know about how these accounts will work and what do they mean for Americans. We asked Peter Foss, our lifestyle expert and advisor on personal finance matters, to explain in simple words what does it all mean.

Q. What is your advice to Americans regarding personal retirement accounts as proposed by President Bush?

Foss: I am glad that you added the words "as proposed by President Bush", because that makes the answer simple. My advice is that Americans who are interested in purely personal finance advice is that they should not opt for them. The personal retirement accounts will lower your retirement income and expose you to a lot of uncertainties at a time in your life when you don't want them. (Related article: No net gain even for young Americans from personal retirement accounts)

I am very disappointed that I have to give this advice since a personal retirement account in principle is a good idea but President Bush has made these accounts worthless because it seems that he was not interested in the financial welfare of American people. He is simply pushing a an agenda . This is what Americans should do:

1. Do not opt for personal retirement accounts when you have a choice (if and when the Social Security is privatized). Let the savings stay as they are.
2. If you have not signed up for a 401(K) account or an IRA, do it as soon as you can and invest it in a way that you can use this account for stock market investments. If your employer does not offer a 401(K) account or a similar program, open an online trading account and try to take advantage of the stock market growth potential. But remember that stock market is the riskiest of the investment options but is a good option to diversify your portfolio.
3. Regularly balance your portfolio by moving investments from high risk to low risk investments as you approach retirement. (Related article: How to get started with retirement planning?)

Q. If personal retirement accounts are a poor choice then why is President Bush pushing them?

Foss: I am also disappointed the way this whole thing has turned out. I have never seen such strong reaction from Americans. I know that President Bush is not the smartest guy on the planet and is not known for his understanding of complex issues like Social Security, but his advisors could have done a better job. For instance, use of words like "bankrupt", "save", and "crisis" were simply designed to mislead and scare Americans since none of these words are true. (Related article: Bush's real reasons for privatizing Social Security)

It seems that he has surrounded himself from people that feed him with an agenda and since he never reads a newspaper or listen to news or meet with anyone who differs with him, he simply believes everything that his close advisors tell him. He is clearly not proposing something that is in the best interest of Americans.

Q. What else would you tell our readers?

Foss: Based on what I am seeing, it is pretty obvious that the message to American people is that they are on their own. With the severe cuts in government programs in the budget and the poor design of the Social Security privatization program, it is pretty clear that Americans need to rely on themselves to plan for retirement. I know it is going to be hard to save for retirement, particularly with higher local and state taxes (the budget this year will cut federal support to states that will force them to raise taxes), but Americans need to accord much higher priority to personal finance. A 401(K) program is an excellent choice because the contribution is deducted from your paycheck and in many cases there is an employer match. In summary, my advice is that do what you can but please do save for retirement.

Recommended article: Retirement planning if you hate to plan