Retirement Archives - The Free Financial Advisor

Retirement Bill in Congress

March 30, 2022 by Jacob Sensiba 2 Comments

Congress has a new retirement bill in the works. They’re calling it Secure 2.0 and it has a few transformational pieces to it that will change retirement saving and retirement income planning. Before we get too far into what this new bill looks like, let’s take a look at what the original Secure Act did.

Secure Act 1.0

The Secure Act was enacted on January 1, 2020, and was the largest retirement reform bill since the Pension Protection Act of 2006. The full title is Setting Every Community Up For Retirement Enhancement (SECURE). And it passed through Congress with a 417-3 vote.

The beginning age to which to start taking required minimum distributions (RMD) from retirement accounts (excluding Roth accounts) was moved from 70 ½ to 72.

People can make retirement contributions no matter what age, as long as they have earned income. The previous limit was 70 ½ when RMDs would begin.

Inherited IRAs (non-spouse beneficiaries) have to have the entire account withdrawn within 10 years of receiving it. This means that if someone passes away and their beneficiary is someone other than their spouse, that beneficiary needs to have the entire account withdrawn and closed within 10 years of receiving the inherited IRA. However, there are exceptions, including a surviving spouse, a minor child (the 10-year rule starts when a child reaches the age of majority), a disabled individual, a chronically ill individual, an individual who is not more than 10 years younger than the IRA owner.

Employees who work part-time, at least 500 hours per year, are now eligible to contribute to their employer-sponsored retirement plan.

Secure 2.0

What’s different with this new law?

For one, the vote passed 414-5. Not as lopsided as the previous one, but still an incredibly convincing tally. “Secure 2.0 is fundamentally designed to make it easier for people to save” – Susan Neely, American Council of Life Insurers President and CEO.

The catch-up contribution provision got a facelift. 401k account owners that are 50 and over are eligible to contribute up to $10,000 more than the maximum for those under 50.

The beginning age for required minimum distributions (RMD) also went up, from 72 to 75. The Yahoo Finance article noted that some reps took it a step further. “ My goal is to get rid of it completely.” – Representative Kevin Brady (R-TX).

The bill would also push employers to automatically enroll new employees into the company-sponsored retirement plan.

Small businesses that stare down the, sometimes, daunting expense of establishing and maintaining a company-sponsored retirement plan can receive assistance. They can receive credits for matching contributions.

One very progressive part of the bill that is sure to garner a lot of attention is the ability of people paying down student loans to save for retirement. The bill would allow employers to “match” a students’ loan payment as a retirement contribution. For example, if the student made a $100 student loan payment, the employer would contribute $100 to their retirement account on their behalf.

The bill introduces a SAVERS credit, which would give lower-income individuals a tax break if they save for retirement.

This is another transformative retirement bill. I’m very pleased society is taking steps to encourage individuals to plan and save for the future.

Disclaimer:

**Securities offered through Securities America, Inc., Member FINRA/SIPC. Advisory services offered through Securities America Advisors, Inc. Securities America and its representatives do not provide tax or legal advice; therefore, it is important to coordinate with your tax or legal advisor regarding your specific situation. Please see the website for full disclosures: www.crgfinancialservices.com

Jacob Sensiba

My name is Jacob Sensiba and I am a Financial Advisor. My areas of expertise include, but are not limited to, retirement planning, budgets, and wealth management. Please feel free to contact me at: jacob@crgfinancialservices.com

www.crgfinancialservices.com/

Pros and Cons of Self-Employment

March 2, 2022 by Jacob Sensiba Leave a Comment

The number of businesses that have started since the start of the pandemic has shot through the roof. People realized how short life can be and decided to take their earning potential and work-life into their own hands. Here are a few stats to illustrate the self-employment picture in the U.S.:

As of 2019, the self-employed section of the population accounted for nearly 30% of total employment (Source).
As of November of 2021, there are 9.9 million self-employed people in the United States.
96% of self-employed people don’t want regular jobs (Source)

Business structures

Sole proprietorship – There is no separate business entity. You are the business entity. That means your assets and liabilities are your assets and liabilities. Banks are more hesitant to lend to sole proprietors than they are for other entity types.

Partnership (LP/LLP) – An limited partnership (LP) has one general partner with unlimited liability and all the other partners have limited liability. Creditors can come after all of the general partner’s assets including things they personally own. Limited liability partners can only lose what they put in. A limited liability partnership provides limited liability to all partners. Profits are paid through on personal tax returns, except for the general partner – they must pay self-employment taxes.

LLC – Very similar to the LLP in terms of how profits, losses, and liabilities are treated. Profits are passed through to employees on personal returns. However, members of the LLC are required to file and pay self-employment taxes.

Retirement plan options

As a self-employed individual, you have a few options when it comes to retirement accounts – Traditional IRA and Roth IRA (available to everyone), SIMPLE IRA, Solo 410(k), and SEP IRA.

Traditional IRA and Roth IRA – Contribution limits up to $6,000 ($7,000 if you’re 50 and older). Withdrawals prior to 59 ½ are subject to a 10% tax penalty unless certain conditions are met.

SIMPLE IRA – available to employers with fewer than 100 employees. Contribution limits up to $14,000 ($17,000 if 50 or older). Employer match available.

Solo 401(k) – Contribution limit is $61,000 ($67,500 if 50 or older). Available to self-employed individuals and self-employed individuals that have their spouse as their only employee.

SEP IRA – Contribution limit is 25% of employee compensation up to $61,000.

Click here for more information about business retirement plans.

Be your own boss

You get to set your own hours and work with whoever you want to. There’s no one to tell you what to do and how to do it. For people that like to make their own schedule and like to go to the beat of their own drum, self-employment makes a lot of sense.

Earning potential

There’s no ceiling on your earning potential. You don’t have a salary range, you make what you make. You can make $10,000 or you can make $10 million. That’s a double-edged sword though, your effort determines your income. You will only make money if you work for it. Someone who isn’t a self-starter, should not be self-employed.

Costs

You have to pay for everything. Whatever the cost of business is for your sector or industry, that’s on you. Health insurance, you have to pay for that. There’s no business or employer that can foot those costs for you. Same with your retirement plan, a lot of employers offer an employee match. If you’re the business owner and the employee, ALL of your contributions are your responsibility.

Disclaimer:

Jacob Sensiba

www.crgfinancialservices.com/

What To Do With Your Old 401k

February 16, 2022 by Jacob Sensiba Leave a Comment

When you leave your job and you have a 401k, there are a few things you can do with it. You can leave it there, you can cash it out, you can roll it into an IRA, or you can roll it into a retirement plan with your new employer. So what should you do with your old 401k?

Theoretically, you have four options.

Withdrawing your funds

If you are under the age of 59 ½ and you withdraw the money, you’ll have to pay a tax penalty on it. UNLESS, you meet some of the exceptions: medical expenses, your first, primary residence (up to $10,000), health insurance premiums while unemployed, distributions from an inherited IRA, pay off an IRS tax levy, higher education expenses, as well as a few others.

If you don’t meet any of those criteria and you’re under 59 ½, you’ll have to pay that penalty. It’s not worth it. UNLESS you’re using that money to pay off a credit card. Credit card interest rates are usually well above 10%. So if you’re saving yourself from paying a 27% interest rate, theoretically, you’re making a 17% return on your money (27–10=17). But this calculation doesn’t account for taxes so you might come out even, or behind.

95% of the time, it makes the most sense to pursue other options.

Keep it where it is

Some people will leave their old 401k with their previous employer. I think a lot of that has to do with laziness, but it could be a good, rational decision as well. The primary factor has to do with cost. What are the expenses of the 401k? Typically, if it’s a large employer and/or a large plan with a lot of assets, the fees are going to be low.

That might be a good reason to leave it. The plan might also have good investment options. If the fees are reasonable, or at least average, then the investment options might be reason enough to stay.

Roll it to your new employer

Nine times out of ten, I’ll have people roll their old 401k into their new one. If they’re able to. Some employers don’t allow income transfers. Having everything with one firm makes managing it so much easier.

The only time I don’t think it would be appropriate is if the new firm has high fees, but it’s also important to compare the new fees to the fees of the alternative. That alternative is rolling it into an IRA at a separate firm.

Roll it into an IRA

As an independent financial advisor, this option is best for me, but not typically best for the client. If you take a standard fee for a financial advisor (1.00 %) and compare it to the standard expense paid by a 401k participant. Employers with 2,000 employees pay below 1% and employers with 50 or fewer employees pay 1.25%. Here’s some more info on that.

That might be the case if it’s a small plan. The large plans, however, can have ALL IN fees of around .5%.

As is the case with a lot of things in the finance world, the answer is not black and white. You need to compare and contrast your options and then make a decision. Here are things to consider: cost, investment options, ease of management, and customer service. How do the fees compare? What are the investment options? Do you have everything in one place and is it easy to make changes? Can you get in touch with someone if you have problems/questions?

Disclaimer:

Jacob Sensiba

www.crgfinancialservices.com/

What’s a Thrift Savings Plan?

January 26, 2022 by Jacob Sensiba Leave a Comment

A thrift savings plan is a retirement plan available to federal employees and members of the uniformed services.

Real quick…Uniformed services are bodies of people in the employment of a state who wear a distinct uniform that differentiates them from the general public. Their purpose is to maintain the peace, security, safety, and health of the public they serve.

Back to it. A thrift savings plan is a defined contribution plan, like a 401k, that offers federal employees the same benefits as people who work in the private sector.

In this article, we learn about what a thrift savings plan is, as well as the rules and regulations.

What is it?

As mentioned in the introduction, a thrift savings plan (TSP) is a defined contribution retirement plan for federal employees.

A TSP includes deferred contributions from employees and can include matching contributions from the federal agencies. The employee also has the option of contributing pre-tax to a Traditional TSP, or post-tax to a Roth TSP.

If applicable, you can rollover a previous 401k or IRA into a TSP, and vice versa if you retire or move back into the private sector.

Investing

Currently, Blackrock is providing the investment products used in the Federal TSP. The investment options include:

The Government Securities Investment (G) Fund
The Fixed-Income Index Investment (F) Fund
The Common-Stock Index Investment (C) Fund
The Small-Capitalization Stock Index Investment (S) Fund
The International-Stock Index Investment (I) Fund
Specific lifecycle (L) funds designed to include a mix of securities held in each of the other five individual funds

Rules and Regulations

Not only is it a retirement plan, but it’s also a government-sponsored retirement plan. Obviously, there are going to be some regulations that accompany it.

The TSP contribution limit for 2022 is $20,500. The government has a sliding scale match, starting at 1% and topping out at 5%. The match is available even if you don’t contribute, though it is at the 1% base amount. It’s a percentage for a percentage match. If you contribute 2%, the match is 2%. If you contribute 5%, the match is 5%.

Fees are considerably lower with TSPs, usually .05%. Like IRAs, TSPs also have required minimum distributions that must start at 72. IRAs have an early withdrawal penalty of 10% if you pull money before 59 ½ years of age. TSPs will waive that 10% penalty if you retire at 55 or older.

Disclaimer:

Jacob Sensiba

www.crgfinancialservices.com/

Tax Tips for Tax Time

January 19, 2022 by Jacob Sensiba Leave a Comment

April is fast approaching and soon, everyone will have to visit their accountants and file their taxes. That said, we need to make sure we are filing taxes correctly. Keeping accurate and up-to-date records is important. Here are some tax tips and how to be well-prepared for tax time.

Contribute to retirement accounts

If you haven’t done so yet, or you’d like to contribute more, you have until tax filing day to do so. For a refresher, here are the contribution limits for some IRAs: IRA/Roth IRA – Max contribution is $6,000 ($7,000 if you’re over 50 or older).

If you have a SEP IRA and you get an extension, you have until October 17, 2022, to make your 2021 contribution.

This is more of a tip for the end of the year, but make sure you take your Required Minimum Distributions. For people that are either over 70 ½ or over 72, depending on when you turned those ages, you need to withdraw money from your IRA. If you don’t, you’ll pay a tax penalty of 50% of the amount you should have withdrawn. For example, if your required amount was $10,000. You’ll pay a $5,000 tax penalty if you didn’t take that distribution.

Make a last-minute estimated payment

If you didn’t pay enough or you didn’t make a payment to the IRS for 2021 taxes, you have until you file to make your payment.

According to the IRS rules, you must pay 100% of last year’s tax liability or 90% of this year’s or you will owe an underpayment penalty.

Get tax docs in order

Get all of your tax documents in order. For earnings for the year, you’ll need one to several forms, depending on what you do for a living and how your business is set up. W2s are pretty common. If you’re an independent contractor, you’ll need 1099.

Itemize your deductions

Most people will take the standardized deduction, which is $12,550 for single filers and $25,100 for married couples filing jointly.

However, if you are self-employed or you have a lot of expenses that are tax-deductible, itemize your deductions. You could save a lot more money IF your total itemized deductions are larger than the standardized deduction.

Home office tax deduction

With the move to work from home still taking place, it might make sense to take advantage of the home office tax deduction. Here are some of the rules:

You must use the space exclusively for business
Expenses related to the space used for business are tax-deductible but need to be calculated according to the amount of square footage used for business
A lot of taxpayers stay away from this deduction, as they think it’s a red flag for an audit. If you’re legitimately using the space as you say and you aren’t fabricating numbers, then you have nothing to worry about

Last-minute tax tips for tax time

Triple-check your work if you prepared your own taxes and file on time. If you’re having someone prepare your taxes on your behalf, make your appointment ASAP because their calendars will fill up really fast.

Disclaimer:

Jacob Sensiba

www.crgfinancialservices.com/

Retirement Costs to Consider

January 5, 2022 by Jacob Sensiba Leave a Comment

You save for years and years…decades and decades. When you’re saving for retirement, an important consideration to keep in mind when you set your nest egg goal is your retirement costs.

When determining and estimating retirement costs, you need to consider what the average expenses are in general and for the retired folks in your area/state. Once you figure out the generalities, you need to adapt it to your situation.

Some items to consider:

Travel – Will you stay in your current home? Will you move to a warmer state or a state without income tax? Do you have family spread around the country? Will you take vacations on an annual basis? If you’re planning on traveling every year, possibly multiple times per year, it’s important to factor those costs into your monthly/annual budget – so you can save for it.
Healthcare costs – When you get older, your body doesn’t typically work as it has in the past. You are also more susceptible to illness (as we’ve seen over the past two years). As a result, your healthcare costs go up.
Housing – There are a few things to consider when determining your housing costs. Will you stay put or will you move? If you move, will you downsize? If you move, will you move to a different state? Does that state have income taxes? What do you anticipate energy costs will be?

Typical retirement costs

People 65 and older have spent an average of $4,847. On average, utilities, public services, and fuel cost an additional $3,743.

On average, Americans spend $10,160 per year on transportation. Retirees spend a little less. Anywhere between $4,963 and $6,618.

The general American population spends $5,204 on healthcare. Retirees spend between $6,792 and $6,619.

American retirees spend $6,303 on food. They also spend, on average, $2,282 on entertainment.

Expect to spend between 55%-80% of current expenses in retirement.

There are 9 states without a state income tax – Alaska, Florida, South Dakota, Tennessee, Texas, Washington, and Wyoming.

These are the states with the cheapest monthly utilities – Idaho ($343.71), Utah ($350.17), Montana ($359.03), Washington ($369.18), and Nevada ($3376.93).

Conversely, here are the top 5 most expensive ones – Hawaii ($730.86), Alaska ($527.96), Rhode Island ($521.98), Connecticut ($496.07), and New York ($477.31).

Disclaimer:

Jacob Sensiba

www.crgfinancialservices.com/

Managing High Inflation in Retirement

December 29, 2021 by Jacob Sensiba Leave a Comment

Inflation is high. We all know that. I’ve been writing about it for months and it appears that it’s here to stay. With all of that said, I saw a question the other day about how to manage the high inflation when you’re in retirement, and I thought it was a good topic to talk about today. So we’re going to discuss high inflation in retirement, how it’s impacting retirees, budgeting strategies, investment strategy changes, and if inflation will be an ongoing concern for retirees.

Inflation right now

It’s high…no surprise to anyone. In January it was 1.4%, in April it was 4.2%, in July it was 5.4%, in October it was 6.8%, and in December it was 5.9%. That’s historically high. The highest it’s been in 40 years. Will that stay, only time will tell and we’ll get into that later.

How is it impacting retirees?

Things are getting expensive, so when you set a budget at the beginning of your retirement you account for the current price of the things you need. You should also account for increased costs of items as time goes on because there can be big or small increases…either way, prices costs will go up.

Groceries and energy are two prime examples of things that have gotten more expensive recently. So when those things went up in price, it probably pinched people’s budgets, and/or pushed forward costs that probably weren’t expected for several years. Odds are, they’re spending more money now on food and energy than they anticipated. Hopefully, people have been able to make adjustments already.

Budgeting Strategies

There really aren’t a lot of tips I can give you. The best thing I can really say is to cut costs where it makes sense to account for things that are now more expensive. The other tip, though this is more of a gamble, is to not make any changes now and make changes in the future when inflation comes down.

Investment Strategies

With your investment, you’ll need to reallocate some assets. I wouldn’t take any money out of stocks. What I would do is take some money out of your bond investments and put it into precious metals. The FED said that they plan on hiking rates three times in 2022. Bond prices will go down when interest rates go up. Increasing your stock allocation or putting some money in precious metals could be a good way to combat inflation.

High inflation here to stay?

No, I do think it will be here until the FED hikes rates, but my reasoning for that has to do with what happened in 2018. If the FED can raise rates without putting a cork in the recovery, then I think there’s a possibility that inflation and the federal funds rate will stay elevated until the bubble pops.

Disclaimer:

Jacob Sensiba

www.crgfinancialservices.com/

Mistakes to Avoid in Retirement

May 27, 2020 by Jacob Sensiba Leave a Comment

In many finance websites, blogs, and articles, a lot has been said about how to prepare for retirement, but I believe there hasn’t been enough written about what to do when you get there. More specifically, there’s a lack of content about mistake, or mistakes, to avoid.

In this article, we’ll explore several mistakes to avoid when you reach this milestone.

Spend beyond your means

This seems obvious, but once the psychological barrier of spending versus savings is breached, people (not everyone) develop this mentality of “I saved for 40 years for this moment, why shouldn’t I enjoy it?”

You should enjoy it. You worked your butt off for it, right? There are strategic ways to do this, however. The mistake is going gangbusters right away.

Create a budget/spending plan – Your budget in retirement will be different than your budget before retirement. Create line items for everything, and get real granular with your discretionary spending (i.e. sub line items to breakdown where the discretionary spending is actually going).
Plan for healthcare – Healthcare costs, generally speaking, will be your largest expense in retirement. Plan accordingly.
Income strategy – More than likely, you’ll have a few different income sources (social security, pension, retirement distributions, etc.). Create a line item for each source.
Senior discounts – Take advantage of every single one. There might be a psychological hesitation with this, as it forces you to come to terms with your age/where you are in life
Spoil grandkids – Every grandparent wants to spoil their grandkids to death, but it must be done within reason. Get creative and be strategic about when and how much.

Make Quick Decisions

Another mistake is making quick decisions. Don’t do it. Any decision you classify as BIG needs to be well thought out. This could be anything like moving, downsizing, vacations, or eliminating a vehicle.

I would argue that any decision about an expense that’s not in your budget/spending plan, should be thought about for several days. My rule of thumb is a week. By then, the euphoria of such a purchase has gone away, then you think more logically about it.

Investing Aggressively

Over the years, a big mistake clients make is the desire to invest more aggressively than they should. Oftentimes, this is to compensate for an inadequate savings rate during their working years or a significant market pullback that hurt their portfolio.

While capital appreciation is still an investment objective in retirement, it’s no longer the primary goal.

This primary goal should be capital preservation. Limiting losses on what you have. This has less to do with time and more to do with your decreasing ability to go out and make more money. Allocate your portfolios accordingly.

Ignoring Estate Planning

Estate planning is a key ingredient to your financial planning recipe. It mustn’t be ignored. Every debt and asset you have needs to be accounted for, listed, and given a task for when you pass.

Estate attorneys can be expensive, but I believe it’s 100% necessary to find one you trust, so your estate is well taken care of.

Isolating Yourself

Your social life is more important than ever. Countless studies show that people with strong relationships outlive those that don’t. So the mistake here is not making your social life a priority.

Join a community, volunteer, retain, and nourish friendships. Whatever flavor of social life sounds desirable, make it a priority.

Letting Yourself Go

Taking care of your mind and body is always important, but especially now. It will keep you healthy, therefore, lowering your healthcare expenditures, but it’s also another way for you to meet people.

Go for walks with neighbors and/or friends. Join a gym. Many of which have reduced rates for seniors. Additionally, many health insurance companies have “silver sneaker” programs that offer inexpensive services and programs for seniors.

Expecting it to be easy

This is a BIG life change and the transition will not be easy.

Not only will you shift from saving to spending, but those social connections you developed over your working years can reduce in frequency and strength.

Go easy on yourself and be patient.

Taking Social Security too early

Unfortunately, there are situations and scenarios where taking Social Security Income (SSI) distributions early is necessary. However, for those of you where this does not apply, speak with a trusted advisor about optimizing your SSI strategy.

Getting Swindled

Scammers adapted. They’re smart and they know how to target susceptible people. Unfortunately, elderly individuals are inherently more at risk than the general population.

Any email, phone call, or text that you receive (unsolicited, of course) should be greeted with a fair amount of skepticism. Don’t willingly give out any pertinent information (name, DOB, social security number, etc.).

Doing it alone

A BIG mistake people make is thinking they can plan by themselves. It would behoove you tremendously to consult with several experts. Estate attorneys and financial advisors should be at the top of this list.

Do your research, check online reviews, and get testimonials from trusted contacts. Having capable professionals in your corner could set you up for success and put your mind at ease.

How My Finances Have Changed with Covid

May 20, 2020 by Jacob Sensiba Leave a Comment

Aside from the death and illness, it has caused, Covid-19 has done a number on the financial system and the economy.

I’m writing this on May 19th, and up to this point, over 30 million people have filed for unemployment benefits.

In my previous post, which can be found here, I detailed how you can plan in the event of job loss.

Even if you haven’t lost your job, more than likely, your finances have changed. In this article, I want to pull back the curtain on how my finances have changed during this environment.

My Job

Thankfully, I’m still working. I work for my family’s business. Technically speaking, we have four family businesses and I work three out of the four in various capacities.

Two out of those three businesses are very resilient during recessions, so I’m not terribly worried about my income from those two sources.

The last, however, will be influenced by movements in the market. If I do my job well, it shouldn’t vary a ton, but if I don’t, my clients will feel the pain, as will I.

The reason being is I, typically, charge a percentage of the assets under management (AUM). If account values go down, so does the fee I receive. The two go hand in hand, as they should. If I do a poor job, I should make less. It just makes sense.

With that said, my income hasn’t moved too much from the financial advising gig. It dropped a little bit last month, but I imagine it’ll come back up by the end of May, as the market has recovered.

Opinion: The Economy

I don’t know if I’ve mentioned it yet here, but my opinion of the economy is darker than some. I think there will be a cascade of bankruptcies in the public and private sectors.

With regard to the public sector, the companies that are rated BBB are already at record highs. When revenues stop coming in or significantly reduce, it’s hard for companies to make interest payments to lenders (holders of debt).

Companies will start defaulting on their debts, and the ability to pay, as well as other factors, help determine the credit rating. This will cause a slew of BBB rated companies to get downgraded.

Funds

With regard to fixed income mutual funds and ETFs, the vast majority of them have rules they need to abide by. One of those rules could be only investing in investment-grade companies.

Investment grade is anything from AAA to BBB. My fear is that when companies get downgraded from BBB to BB, it’ll cause funds to dump those companies; exasperating the sell-off.

My Finances

With that said, here’s how I’ve adapted.

My finances really haven’t changed much. I’m spending more on groceries, especially right now as I am stocking up on certain goods. The added benefit of that is I’m spending less on food from restaurants, which saves me money and I’m eating healthier too.

So you’re spending more on groceries and less on take-out…what else? Well, given the nature of Covid and the uncertainty that surrounds it, my priorities have shifted a little.

More Cash

I’ve planned my clients’ portfolios with the above scenario in mind. The majority of clients aged 60 and up are positioned more conservatively than normal. With that in mind, all of the portfolios I manage will take a little hit, and my income will drop as a result.

I’ve suspended my retirement contributions, via payroll deduction, until I feel comfortable again. This may seem counterintuitive because of the stress I put on leaving things alone and dollar-cost-averaging as prices go lower.

Due to the fact that my income has some variability, not to mention my rental property and the uncertainty of my renters’ making rent payments (because of talks about forgiving rent payments for those affected by Covid), I have to keep more cash available than normal.

Retirement Contributions

As I mentioned, I stopped my automatic retirement contributions, but I am making voluntary contributions to my Roth IRA when I feel my cash available is adequate.

Other than that, nothing else has changed. Debt payments will continue as planned and saving for a down payment on a house will also continue.

Be advised: Any opinion expressed about the market/economy is strictly an opinion and should not be viewed as a certainty. Additionally, my preparations for said opinions are specific to me. Consult your financial professional about your particular situation.

Investment Tips: How much should I have in my 401(k)?

May 14, 2020 by Susan Paige Leave a Comment

Part of planning for financial freedom is making sure that you are financially protected when you hit retirement. However, only a few know how to maximize their 401(k) in a retirement investment account as part of their overall portfolio.

If you want to explore the basics of investing your 401(k) to increase your retirement benefits, no worries. This article provides you with a summary of the five (5) most useful tips on how your 401(k) can help you retire with more financial security.

What are 401(k) Investments?

Before going into the details, you should know that a 401(k) investment is basically a retirement savings tool sponsored by your employer. This tool allows you to invest a portion of your paycheck into a retirement investment account. Your money will grow tax-free until you are retired, and that’s when you can use it.

The question that many ask is about the portion: how much of one’s paycheck should go into this retirement investment? In addition to that, here are some tips about putting a part of your paycheck to your 401(k) investments.

Invest Early

It is true that you can begin your retirement investment later when you are older. However, the earlier you start investing, the better. In fact, it is best to start contributing to your 401(k) as soon as possible. In doing this, you earn more. That’s just how compound interest works: you gain more interest when you start earlier. If you are a young worker, you have the advantage of the time that older folks will never ever have. Invest early.

See How Much You Can Set Aside

As a rule of thumb, you need to invest a percentage of your earnings that is equivalent to the difference between 100 and your age. For instance, if you are 20 years old, you need to invest 80% of your earnings as savings or into your retirement fund. This is based on the assumption that, at an early age, you still don’t have many responsibilities and can afford to invest more money.

If that amount or percentage is too high, you can decide on a fixed annual amount. For example, you can contribute a max of $19,500 to your 401(k) in 2020 if you are under 50. All you have to do is calculate a fixed amount below the threshold of $19,500.

Hire a Portfolio Manager

Still unsure or want to maximize your investments? You can explore other options such as using a robo-advisor such as Wealthfront or Betterment. This is one of the best options for someone who is unsure or does not know how much they should invest.

The robo-advisor will run the numbers for you to determine the best combination of investments in your 401(k) fund. You can set the target amount you need for retirement and the algorithms will compute how much you need to set aside every month or year so that you can have that amount when you retire.

Match Your Employer

Another way to determine how much you should contribute in your 401(k) is to look at how much your employer is contributing. For instance, if your employer only offers a maximum of 10% of your salary, then you should match your employer and contribute at least 10% as well to get the most out of your 401(k) investments.

Check Investment Types

When you contribute funds to your 401(k), you have to choose which investments it goes to. With each kind of investment, there is a specific percentage of return based on the risk profile. Since the percentage of return is different for each investment, your choice will affect how much you need to contribute in the 401(k) so that you can reach your target retirement funds.

If you have enough in your 401(k), before you start computing, consider the types of investments that you will choose. For instance, if you choose to invest in the stock market, you will earn more and faster but the risk is higher. If you want to do this, you might want to invest a lower amount.

On the other hand, you will have more stable returns if you invest in mutual funds. However, interest will be less so you want to contribute a higher amount to achieve the retirement fund levels that you want.

Takeaways

For dignity and independence, you want to retire with enough funds so that you won’t need to depend on help from your children or other people. With the investment tips summarized in this article, you can think about your best options to save and invest money in your 401(k) for your retirement. The five (5) points summarized in this article should help you begin to find the answers to all your basic questions and concerns.

For more great articles from The Free Financial Advisor, consider these:

Financial Planning Basics – The Financial Pyramid

How Long Should You Keep Financial Records After A Death

What Advantages Are There To Saving Money In The Bank?

How To Recover Paystubs From Your Old Job

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Roll it to your new employer

Roll it into an IRA

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Investing Aggressively

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Expecting it to be easy

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Invest Early

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Check Investment Types

Takeaways