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You are here: Home / Archives for 401(k)

Will My 401(k) Last for the Rest Of My Life?

April 23, 2018 by Doug Carey Leave a Comment

If you’re starting to think about retirement, and your career has largely been in the private sector, your 401(k) balance could be the most important factor in determining whether you’re on track to retire or not.

Whether your 401(k) will cover your spending needs until the end of your life will depend on a lot of factors. It’s important to not just pin your hopes on a certain target for an account balance–a million dollars, two million dollars, whatever–and instead look at the whole picture. So let’s start with a few other questions that are just as important.

Are You Saving as Much as You Can in Your 401(k)?

There’s almost no way around it: You have to save money to make money. There is often a bit of a free lunch–call it a free appetizer–when it comes to 401(k)s, though: The amount your employer matches your own contributions. It could be a dollar-for-dollar match up to point, or some percentage of what you contribute yourself that increases over time. Either way, you definitely want to contribute at least this amount, or you’re leaving that free appetizer on the plate.

But that should really only be the beginning of any 401(k) savings plan. Fidelity advises saving 15% of pretax income.  If you’re 30 or 40 years old and haven’t given the issue much thought until now, that number should serve as the minimum you should save.

Get into the habit of increasing your contribution percentage each year. Psychologically speaking, if you never see it hit your paycheck (because it’s going straight to your retirement account), you won’t miss it. Set an annual calendar reminder to increase that contribution, even by a half a percentage point. Between the contribution increases and salary increases, you should be able to put your contributions on a sharp upward trajectory.

What Else have You Got?

Once you have your plan for annually boosting 401(k) savings in place, consider what other sources of income you are counting on at retirement. Social Security is an obvious one. If you’re lucky you might have a pension of some sort. Brokerage accounts, rental property, or the planned sale of some asset like a business should all be taken into account as well–and will almost certainly affect how long you can expect your 401(k) will last.

Will you run out of 401(k) money in retirement?

Another reason not to simply come up with an arbitrary hit-your-number mark: Spending matters. At the risk of stating the obvious, your 401(k) and other investment assets will generally last longer if you plan to sip rather than gulp.

You’ll want to have a very solid grip on your plan’s MPG–that is, your projected spending in retirement–to get an accurate reading.

Will your 401(k) plan last long enough?

What Is It Costing You?

Even if you are diligent about saving to your 401(k), you probably haven’t considered what the plans might be costing you.

And why would you? The plan administrator’s fees–in addition to the fees paid to the fund companies themselves–are largely out of your control.

But it’s important–especially the further you are from retirement. Fees can really chip away at account balances over time. Consider a 401(k) returning about 7% annually. Here’s what happens if we modify the fees by half a percentage point and assume contributions of $18,000 per year.

Will Your 401(k) Plan Last Long Enough

Your main recourse here is to talk to your HR department and start asking questions. What are the fees of running the plan? How do they compare with fees offered by other plan administrators for companies of your size? Making sure the HR team has done their due diligence on this could mean tens of thousands of dollars to you.

You can also look at the fees charged by the funds themselves. Funds have expense ratios; actively managed funds generally have higher expense ratios than passively managed funds. To keep things really simple, consider a target-date retirement fund, which shifts its asset classes toward less risk the closer you get to retirement. (And if your plan does not offer a target date retirement fund, it should.)

Your 401(k) Is One Piece of a Larger Puzzle

A large 401(k) balance could have a big effect on when you can retire and your living standard when you do. But looking at it in the context of everything else we’ve talked about here is more important than an absolute dollar figure. Total savings, where you plan to invest your assets, the cost of those investments, and your spending habits are all complementary forces that will factor into a successful retirement plan.

Read More

  • How to Split an IRA or 401(k) in a Divorce
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  • How to Save for Retirement
  • Investing Your Way to Retirement

Filed Under: Retirement, Uncategorized Tagged With: 401(k), Retirement, retirement plan

How to Split an IRA or 401(k) in a Divorce

July 19, 2012 by TheOtherGuy 11 Comments

Divorce is ugly.  Except under the most limited circumstances, no one wins in the divorce game.  Then, you add the complexity of money into the equation and it gets downright hideous.  In that emotional time, it’s easy to understand why so many people divide IRAs, 401(k)s, and other retirement accounts sub-optimally.

You can’t just “take the money out and give it to my spouse”  That would be a big mistake.  Let me count the ways:

Let’s assume you own a $250,000 401(k) balance.  The judge rules that you’re required to split that 50/50 with your spouse, so you decide it would be easiest to make a phone call and take the money out.  Ouch.  If you do that, you’ll be hit with a 10 percent early withdrawal penalty (yes you, not your spouse, and only if you’re under 59 1/2) and then the amount you removed is added to your taxable income for the year.  Now, for many reading this blog, you’ve just lost 35-45%.

So how do you give $125,000 to someone?  Oh that’s easy – you gift that to them.  But in your haste, you didn’t do this correctly either. To gift it, you either need to reduce your lifetime exemption by filing a form 706 with your income taxes next April, or pay a gift tax of 50%.

Long story short: “taking it out” could be a massive financial mistake.

Instead, consider asking for a QDRO, or Qualified Domestic Relations Order (pronounced quad-row).  A QDRO put together by a competent attorney and signed off on by the judge makes this transfer a ton easier.

First, it directs your retirement plan company to establish another qualified plan in the name of your spouse.  Then, it directs a tax-free transfer to that newly established account.  No taxes, no penalties.  Easy as pie.

Once you’ve begun working on that, you’ll want to make sure the QDRO says that your soon-to-be ex-spouse can’t make any loans or transfers from the account until it’s been split; or you could just pick a date to make the transfer effective on (retroactive) and put a fixed dollar amount based on that date’s plan balance.  This would protect the new beneficiary from being bamboozled by his or her ex.

Finally, don’t forget about pension plans.  A lot of those can be “QDROed” too.  For example, let’s assume your spouse earned a pension at his job of $4,000 during the 30 years he worked.  He was married to you for 20 of those 30 years – making you the owner of 2/3 of his $4,000 per month.  By putting the QDRO in place before he retires, she can have her own pension plan – quite the deal!

At the end of the day, divorce planning with money is just as important as married couple planning.  If you don’t do it, you’ll regret it.  Take the time to review everything – hire a professional and don’t try to cut corners.  The costs are too severe.


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Filed Under: money management, Planning, Tax Planning Tagged With: 401(k), divorce, IRA, Marriage, Pension, QDRO, Qualified domestic relations order, Roth IRA, Tax

Are Senior Workers As Respected As They Should Be?–A Cuppa Joe Discussion

March 29, 2012 by Average Joe 21 Comments

My dad is a GM retiree.

Where do your thoughts jump when you read that statement?

I was in a coffee shop recently where two men were talking about legacy costs…paid out to people like my dad. These were both younger workers, and the opinion seemed to be that people like my dad are an unnecessary tax on the system.

One guy said, “Those people should have saved more money. If they’d saved, they wouldn’t need that pension.”

I know that immediately many people who read this will think my dad is part of the reason GM went bankrupt. He receives a generous pension, has health care coverage and lives comfortably. He’s relatively young still and I hope he lives for a long time. That means that his benefits will continue to weigh on the company.

 

No Savings? Why Not?

 

My uncle also is a GM retiree. Around the year 2001, as the stock market experienced day after day of unnerving free fall, I happened to be standing next to him at a funeral.

Uncle: The stock market sure is all over the place. Your job can’t be easy right now.

Me: No, it’s not. Lots of people with 401k plans out there taking a beating and looking for advice.

Uncle: 401k plans?

Me: Yeah, like the one you have at GM.

Uncle: You know, I’m glad I never bothered with that. Look at all the money those people lost. I’ll stick with the pension.

At first, I thought poorly of my uncle. But for him and many others working in industry, a 401k plan was always considered “icing on the cake.” He also receives a generous pension and has health care coverage. Why should he risk hard won dollars in investments that could tank?

Because he didn’t invest online, mainly to practice internet safety for seniors, he’ll now be a burden on the system for years to come. However, the course he chose was a viable option at the time.

 

Reworking the Implicit Deal

 

This article at Timeless Finance recommends (among other things) that older Canadians should be forced into retirement by age 60. According to the author, this will energize the workforce and help young people get jobs….all at the expense of older workers.

Would this really work as intended? Will it help?

Before we tackle that argument, let’s evaluate the historical situation: it was a different game for my dad than it is for many of you and I. He worked in an era of “work for a large company to care for your family for 30 years, and then the company will take care of you.”

It was an implicit deal.

Now the deal has changed, and there’s a push to change it further. I’m sure many older workers wish the deal had been explicit.

You have to be a moron to not understand the shaky economics of our world financial situation.

  • There’s more fallout to come from the housing crisis.
  • The student loan bubble is about to pop.
  • European states are ready to topple like dominos.

But do we have to immediately jump to changing the deal for people who played the game “correctly” only to find the rules changed later?

 

Will Eliminating Older Workers Help?

 

I only told you half of the story about my dad and uncle. The other half is that both my uncle and dad are gainfully employed at the moment. They both play by the rules (their income is low enough that it doesn’t affect their guaranteed income stream from Social Security or their pension plans).

It isn’t just good for my relatives; it seems it’s good for business. According to this Entrepreneur magazine article, companies that hire older workers reap benefits as wide-ranging as:

  • Higher quality work
  • Punctuality
  • Listening skills
  • Organizational skils
  • Honesty

According to the Timeless Finance author, both my dad’s and uncle’s part time jobs should be handed to younger workers.

But I’ve seen my uncle and dad work at their jobs. Young coworkers ask their opinion frequently. In fact, the owner of the golf course where my dad works often consults him about overall operations. Customers gravitate toward them, thinking these men know what they’re doing. Both of these men possess tons of insight and knowledge help their employers succeed.

My opinion: If I still had my boner of the week segments, this Timeless Finance article would have been on it. While some of the suggestions make sense to me, and we clearly need change, I believe that we should look elsewhere for money rather than eliminate experience for youth. I also think it’s a mistake to penalize people who played by the rules as they knew them until we’ve looked under other stones.

Okay, everyone….your thoughts? Do we treat seniors fairly? Should we have a mandatory retirement age?

(photo credit: Hubert Elliot in the Rowan County Maintenance Yard Office: NCDOT Communications, Flickr)

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Filed Under: Cuppa Joe, Feature, Meandering, smack down! Tagged With: 401(k), free advice, free financial advice, Individual Retirement Account, Mandatory retirement, Pension

Goal Setting and Pretty Retirement Charts – Our Cuppa Joe Discussion

March 22, 2012 by Average Joe 10 Comments

Every Thursday we grab a cup o’ Joe and talk opinions on financial matters…..today we’ll chat about goal setting and workplace retirement plans.

My opinion: Do you know those 401k asset allocation charts in the front/back/middle of your workplace retirement plan booklet? They’re color coded circles of slick graphics, and are often found at the conclusion of a survey about the amount of risk you should take in your investments.

Those pie charts are nearly irrelevant when it comes to financial success.

Each day in a workplace somewhere in America you’ll find a fast-talking 401k-hocking yahoo teaching a group of people how to use these silly charts to determine how much risk they “want” to take.

How much risk you “want” to take?

“Want” and “financial success” rarely coexist when talking about money management. Most people want zero risk and huge returns. They also want Santa Claus to be a little more kind next year than last.

Is “how much risk do you want” really the question you should be asking with your 401k plan?

 

I have a better question.

 

Try this one on: How much risk do you need to take to reach your goal?

Isn’t that the question these surveys should be asking?

I know this doesn’t sound like rocket science, yet you’d think so if you’ve ever read workplace retirement plan guides. In many cases, risk tolerance charts and savings guidelines are presented as two entirely different discussions.

Huh?

Let’s be clear about what I’m discussing here. If you’re going to achieve financial success:

Find out how much you need to save.

Then learn what return you need on that savings.

 

If I had control of these workplace pie charts, here’s what I’d do

 

I’d gather everyone in the conference room and show the group how to determine the amount they need to save to reach financial success. I know that’ll differ for everyone, so it’ll be important to focus on goal calculators. With the boss’s permission, we’d follow this up with generous portions of alcohol. We’ll call it “Some of You Will Be Happy” Hour.

Second, I’d help everyone determine what return they need on that savings to achieve the retirement goal.

Sounds like I’m repeating myself, doesn’t it? I’m not.

 

Here’s where we finally insert the silly quiz

 

Third, the employees would be presented with the risk tolerance quiz. Everyone could see if the asset mix they (historically) would have needed to reach financial success matches their risk tolerance.

If so, more Happy Hour.

If it doesn’t: Houston, we have a problem.

 

The real problem

 

If you aren’t going to reach your goal, you have a choice to make: either save more money or raise your risk tolerance. One requires sweat, the other education.

Which path would you follow?

I believe that once we begin presenting 401k plans this way, instead of with some inane chart about your “risk tolerance” (lots of people very comfortably missing their goals out there), we’ll finally begin to realize that every goal can be met through a simple equation:

 

Savings x Return = Goal

 

How you approach one side will affect the other.

 

Okay, discussers, let’s go:  Do you have a workplace retirement plan? Did it come with a silly risk tolerance chart…or did they present retirement in the brilliant manner I have above?

Enhanced by Zemanta(photo credits: Nutty pie chart: Sebastien Paquet, Flickr;                 Teeter-totter: Rambergmedialigmages, Flickr

Filed Under: Cuppa Joe, Planning Tagged With: 401(k), Goal, Retirement, Risk aversion, Saving

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