Category: IRAs

How to Get Your 401(k) Ready for Retirement

In a recent Wall Street Journal article the writer gives those who are getting within 10 years of retirement six very useful ideas about getting their 401(k) plans prepared for the day they will actually leave work.

  1.  If you haven’t done it lately, review your 401(k) investment mix.: Typically after people enroll in employer-sponsored plans and make initial investment choices, they forget about how their money is allocated in the plan—sometimes for years.  Don’t let this happen to you.  It may mean that just as you should be getting more conservative you are actually increasing your risk.
  2. Beware of the rate sensitivity of fixed-income funds you own in your 401(k).:  Bonds traditionally were the safe-haven choice for near-retirees, but the bond market has changed and rising rates could result in losses just as retirement approaches.  Not all bond funds are created equal and caution is the watchword in today’s bond market.
  3. Look for greater variety within your 401(k).: When advisers construct portfolios for clients, they often include a mix of U.S. and international stocks, multiple types of bond exposure and, increasingly, “alternative” investments such as commodities and a variety of hedge-fund-like strategies.  So should you.
  4.  Use IRAs and other accounts to complement your 401(k).:  Too often people who change jobs leave their 401(k) behind at their previous employer.  When you leave, roll your 401(k) money into an IRA and don’t leave “orphan” accounts behind and unattended.
  5. Check whether your 401(k) plan includes a brokerage window, or self-directed account.: if your plan allows you to make your own investment decisions, you can often get greater variety and better asset allocation options than are offered in most 401(k) plans.
  6. Consider getting professional advice. : As you would expect we are 100{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93} behind this recommendation.  In fact, if you want guidance with your 401(k), call us and see what we can do for you.

Retirement planning more important than ever

The concept of retirement planning is relatively recent in human history.

Let’s face it, for most of human history there was no such thing as “retirement.” People’s lives were shortened by hunger, disease, childbirth, wars, and accidents.  A relatively few lived to a ripe old age.  For those who did, the plan was to have enough children who would support them when they became too old to work.

In the lifetimes of our parents and grandparents, pensions were created that provided an income after leaving work.  And, of course, social security made its appearance in the 1930s to supplement savings and pensions.

Due to poor investment performance companies realized that they could not continue to pay generous pensions for thousands of retirees so they who dropped them in favor of 401(k) plans, taking the burden of providing retirement income from the employer to the employee.   Even governments are finding that there is a limit to their ability to tax and pay people in retirement.    There are many ways people can take care of their retirement income needs:  401(k)s, IRAs, and the ever-faithful investment account.

The generation that can count on pension income for their retirement is now retiring.  The younger generation now has the responsibility to take care of its own future.  This makes retirement planning more important than ever, and no place for amateurs.  Give us a call to help you meet your retirement goals.

Why Small Firms Should Set Up 401(k)s

From the Wall Street Journal.  Tips on why smaller firms, even as small as a single employee, should set up a 401(k). 

First the bad news: A recent study by SurePayroll found that more than 70{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93} of small firms didn’t offer a 401(k) plan to their employees.   That comes at a time when the need for more money to retire is becoming obvious.  The good news is that the average amount in 401(k) plans is $80,600 according to Fidelity Investments.

The reason more small companies don’t start a 401(k) plan is the perception that they are difficult to start and hard to administer.  Neither is true.  There are a number of companies that administer 401(k) plans for small businesses.  In addition, local RIA firms will be happy to set up a 401(k) for you and meet with your employees to explain the plan.  The giant providers won’t do that. 

The financial advantage to business owners is significant.  You can put up to $17,500 away per year ($23,000 if you’re 50 or older), much more than into an IRA.  In addition, the plan attracts and retains good employees as well as being a good way for them to save for their own retirement. 


The "Orphan" 401(k)

Have you changed jobs in the last few years?  Or retired?  If you are like a lot of people you may have left your company retirement plan behind.  Doing something about it was not a priority and besides, you were not really sure what you should do.

I recently read that every day in America 10,000 people are retiring. In top of that, millions have lost their jobs during the recession and finding a new job has had a higher priority than doing something about your 401(k).

Now it looks that a growing number of companies are going to force the departed employees off their rolls.   The fact is that it costs companies to maintain retirement plans and those costs are often tied to the number of people in the plans.  It costs your former employer to maintain the records and when times are tough, even these costs are going to be pared.

These people may not know it but their old employer is doing them a favor. Money left in old 401(k) plans is rarely managed the way that it should be.  But what should people do with “orphan” 401(k) plans.

There are a few things that they can do, but first let’s mention what should not be done.

  • Take the money out of the plan and spend it.  The purpose of any retirement plan is to provide income during retirement.  Many people spend 30 or more years in retirement.  401(k) plans are designed to provide a supplement you social security and pension payments once your working days are over.  Taking the money out subjects you to an immediate income tax on the withdrawal amount.  In addition if you are under 59 ½ you will be subject to an additional penalty tax of 10%.  You could lose nearly half of your money in taxes if you make the wrong decision.

Here are the choices you have which can retain the tax deferral and allow you to use the money during retirement.

  • If you move to a new employer who provides a 401(k) plan you can transfer to old 401(k) to your new plan.  Make sure that this is done properly or you may be subject to taxes or penalties.  Check with your new employer for the proper procedure.
  • Roll the old 401(k) to an IRA.  This is the preferred alternative since the choice of investments in 401(k) plans is very limited and the choices in an IRA are almost limitless.

That still leaves you with the challenge of making the appropriate investment decisions. Before making the decision regarding which investments to make, let me suggest an intermediate step.  Prepare a plan or have a financial professional prepare a plan for you.

I wise man once said that if you don’t care where you’re going any road will take you there.  Planning is one of the most overlooked things that people do with regard to their retirement.  A plan of some kind should always precede making investment decisions.  It doesn’t have to be an elaborate plan document with a hundred pages of numbers, tables, and graphs.  Like fixing your car or writing a will you may be able to do it yourself, but you are better off getting someone who has the proper tools to do it for you.

The plan should provide you with the kind of guidance you need to determine how your should structure your investments, whether you need to save more, or how much you can expect to be able to spend once you are retired.  But one of the keys to successfully meeting your goals is to avoid leaving the money you have saved for your retirement scattered around in various “orphan” accounts at former employers.

Working with Widows

Advisors who work with widows know that there is often a great deal of confusion after a spouse dies.  Widows are often told not to do anything for a year.  This is terrible advice.  First of all, assets held in joint name have to be transferred into the name of the surviving spouse.  Beneficiaries have to be updated on retirement accounts and insurance policies.   Trusts and wills have to be reviewed.  And investments that were made and understood by the deceased are often not appropriate for the survivor. 

The best advice for the widow is to find a trustworthy financial advisor, explain the situation and allow the advisor ro guide the widow through the process of getting on with life.  Of course, it’s easier if the has a copy of the Before I Go Workbook to help.

Open a Roth IRA for Minors

Consider this example: If a child invests $2,000 in a Roth IRA each year from ages 13 to 17, that $10,000 could increase in value to almost $296,000 by age 65, according to research by  T. Rowe Price. That assumes the account earns a 7% annual rate of return. If that panned out, the account could provide tax-free income of $11,800 a year for 30 years.

Tax-free compounding of earnings inside an IRA is a beautiful idea — and a powerful one. The longer you can keep your money invested in a tax-free vehicle, the greater your wealth accumulation. What better way to accumulate a large amount of savings than to start during childhood? When tax-free compounding has more than 50 years to run its course, a relatively modest savings plan can produce substantial wealth.

There’s no minimum (or maximum) age to set up a Roth IRA. And there’s no requirement that the same dollars that were earned be used to fund the IRA. If your child earned money on a summer job and spent it on whatever kids spend money on these days,* there’s nothing wrong with using money provided by parents to establish the IRA. The child has to have earned income, though.

The major impediment to IRAs for children, especially young children, is the earned income requirement. An unmarried person must have earned income of his or her own to contribute to a Roth IRA. The income has to be compensation income, not investment income. And it has to be taxable compensation income.

That doesn’t mean your child has to actually pay tax on the income. If the total amount of income is small enough so your child doesn’t have to pay tax, that’s okay. But your child has to have the kind of income that would call for a tax payment if the amount were large enough.

Smart Ways to Manage a Windfall

Whether you have received an inheritance or won the lottery, before you splurge, take time to consider all the financial angles and come up with a solid plan.  There is a reason most lottery winners wind up broke.  Shady financial advisers may shower you with dubious investment schemes. Long-lost relatives could reappear with hard-luck stories. You might be tempted to quit your job, buy a more expensive house or make other costly decisions that could make your jackpot quickly disappear.  The bigger the jackpot, the greater the chances that you will be the victim of bad decisions.

Many people view a windfall as “found money” and treat it differently than money they’ve earned.  They’re much more likely to use it in a way they’d regret.

Win or inherit enough and banks will lend you enough money to put you in debt.  Yacht brokers will call, as will Realtors will call who have your dream home on the market.

Some financial planners advise waiting  until you give yourself time to come up with a solid plan for how you’ll use the money.   If your inheritance includes an IRA, there are special rules that you will want to consult with financial planners on.

The biggest mistake people make with a windfall is not figuring out how to make the money last.  If the money is big enough, assemble a financial team that includes a financial planner, a CPA (certified public accountant) and perhaps a lawyer.  If you are unaccustomed to handling large amounts of money, a financial planner is the most important part of the team.  You will want to do a search of planners who have a CFP™ (Certified Financial Planner) in their title, and someone with whom you are comfortable discussing your personal financial needs and goals.

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