401(k) | Financial Planner | Retirement Planning | Korving & Company Suffolk & Virginia Beach

Avoid These Common Retirement Account Rollover Mistakes

If you are one of the people who are uncertain of the basic financial steps to take when you retire, you are not alone. Author and public speaker Ed Slott recently recounted how little most people really know about what to do with their 401(k)s, IRAs and other retirement assets when it comes time to leave work.

Most people do not know what to do with their retirement plans (commonly referred to with obscure names like 401(k), 403(b), 457, and TSP) once they retire. Many people simply leave the plan with their former employer because they don’t know what else to do. But that could end up being a mistake. Others know they can roll their plan into a Rollover IRA, but are not aware that if they don’t do it exactly right, they could be faced with a big tax bill.

Handling IRAs is often fraught with danger. There is a big difference between a rollover and a direct transfer. Rollovers are distributions from a retirement plan. Sometimes they are paid directly to you via check. You then have 60 days to move the assets into a new IRA or you will be taxed. If the rollover is paid directly to you, it is customary to have 20% automatically withheld for taxes. Counter-intuitively, you have to replace the 20% withholding when you fund the new IRA or that amount will be considered a taxable distribution and you will owe tax on the amount withheld. You can only make one rollover per 12 month period. If you make more than one rollover per year, you will be taxed.

A direct transfer is one where your IRA assets are moved from one custodian to another without passing through your hands. Under current law you can make as many direct transfers per year without triggering a tax penalty and there is no withholding.

When you are retired and reach the age of 70 ½, you will encounter Required Minimum Distributions. If these are not handled correctly, they can trigger huge tax consequences. If an individual fails to take out the Required Minimum Distribution (RMD) from a retirement plan, there is a 50 percent penalty tax on the shortfall.

Even many people in the investment industry do not understand the rules well. Slott notes that many financial companies do not provide advice on these topics because they are so focused on accumulating assets that they do not train their advisors on “decumulation.” Decumulation is a term that applies to retirees once they begin to take money from their retirement plans to supplement their other income sources.

“Every time the IRA or 401(k) money is touched, it’s like an eggshell; you break it and it’s over…. You mess up with a rollover and you can lose an IRA.”

Retirement is a time when people want to relax and pursue their leisure activities. Unfortunately, the rules actually get even more complicated. Make sure that you take time to learn the rules, or find a professional that does, before you move money from a retirement account.

Why roll your 401(k) over when you retire?

According to an article in 401(k) Specialist Magazine, 401(k) providers favor proprietary products. What does this mean to the typical worker? Here’s the bottom line:

“Mutual fund companies that are trustees of 401(k) plans must serve plan participants’ needs, but they also have an incentive to promote their own funds.
The analysis suggests that these trustees tend to favor their own funds, especially the poor-quality funds.”

The article goes on to say that these fund companies often make decisions that appear to have an adverse affect on employees’ retirement security.

The investment industry is, unfortunately, rife with conflicts of interest and bad apples. That is why a prudent investor should work with a trusted investment professional who is a fiduciary. A fiduciary has an obligation to place the client’s interests ahead of his own. As a rule of thumb, a fee-only, independent, Registered Investment Advisor, who does not work for one of the large investment firms that have to answer to public shareholders, and who has access to virtually all investment vehicles, has fewer conflicts.

As we mentioned in a recent article:

A fee-only RIA works for you. Stockbrokers, insurance agents, even mutual fund managers, work for the companies that pay them. They are legally required to work in the best interest of their employers, not their clients. Some of them do try to work in their clients’ best interests, but there can be large financial incentives to do otherwise. A fee-only RIA works only for you. We act in your best interest and use our expertise to allow you to take advantage of opportunities in good markets and weather the bad ones.

This gets back to the original question. Rolling your 401(k) into an IRA with someone who isn’t trying to get you to invest in “poor quality funds,” does not have a conflict of interest, and is legally obligated to put your interests ahead of his own is a good reason to roll your 401(k) into an IRA.

Are You an "Affluent Worker?"

Forbes magazine recently had an article about some of our favorite clients. They call them the “High Net Worker.” These are people who are successful mid-level executives in major businesses. They range in age from 40 to the early 60s. They earn from $200,000 per year and often more than $500,000. They work long hours and are good at their jobs.

According to the Forbes article, many have no plans to retire. Our experience is different; retirement is definitely an objective. But many have valuable skills and plan to begin a second career or consult after retiring from their current company.

At this time in their lives they have accumulated a fair amount of wealth, own a nice home in a good neighborhood, and may be getting stock options or deferred bonuses. That means that at this critical time in their lives, when they are focused on career and have little time for anything else, they have not done much in the way of financial planning.

When it comes to investing, most view themselves as conservative. But because of their compensation their investments are actually much riskier than they think. It is not unusual for executives of large corporations to have well over 50% of their net worth tied to their company’s stock. Few people realize the risks they are taking until something bad happens. For example, the industrial giant General Electric’s stock lost over 90% of its value over a nine year period ending in 2009. The stock of financial giant UBS dropped nearly 90% between May 2007 and February 2009. These companies survived. There are many household names, like General Motors and K-Mart whose shareholders lost everything.

The affluent worker’s family usually includes one or more children who are expected to go to college. Many of these families have a 529 college savings plan for their children. Most have IRAs and contribute to their company’s 401k plan, but because many don’t have a financial planner they do not have a well thought out strategy for this part of their portfolio.

At a time when many less affluent families are downsizing, many families in this category are either looking to upgrade their homes, buy a bigger home, or buy a second – vacation – home. They may even help their adult children with down-payments.

If you are an Affluent Worker, give us a call and see what we can do for you. If you already have a financial advisor, it may be time to get a second opinion.

What Rich People Need to Know

I ran across an article at Market Watch titled “Ten things rich people know that you don’t.” It listed the usual things:

Start saving early
Automate your savings
Maximize contributions to 401(k)s
Don’t carry credit card debt
Live below your means
Educate yourself about investing
Diversify
Hire a qualified financial advisor

All of that is something to take to heart when you’re young and just starting in life. But what do people who are already rich need to know?

Lots of people get rich without following the rules. They may start a successful business, enter a highly compensated profession, climb the corporate ladder, win the lottery, become a sports star or inherit a fortune. Once you are rich, the number one objective for most people is to stay rich. One very successful financial advisor with just 28 very wealthy clients said

“People don’t come to me to get rich, they come to me to stay rich.”

That’s the role of a good financial advisor. Their job is to do more than manage their client’s portfolios, it’s to take care that all of the other boxes are checked off: to diversify the client portfolio, to educate the client about investing, to see to it that they live within their means. In many cases they take care of family issues, lifestyle issues; the kinds of things that family offices do.

It’s what we do. It’s what our clients expect.

Have a wealth maintenance question? Contact us.

Are you flunking the retirement readiness test?

A recent article in Financial Advisor proposed an interesting analogy: “Imagine boarding a jet and heading for your seat, only to be told you’re needed in the cockpit to fly the plane.”

That’s the situation many people are finding themselves in today. Once upon a time, employers set up pension plans managed by investment professionals. You worked and when you retired the pension checks began coming for the rest of your life.

That ended when 401(k) plans began replacing defined benefit pension plans.

Once, employers made the contributions, investment pros handled the investments and the income part was simple: You retired, the checks started arriving and continued until you died. Now, you decide how much to invest, where to invest it and how to draw it down. In other words, you fuel the plane, you pilot the plane and you land it.
It’s no surprise that many people, especially middle- and lower-income households, crash. The Federal Reserve’s latest Survey of Consumer Finances, released in September, found that ownership of retirement plans has fallen sharply in recent years, and that low-income households have almost no savings.

But it’s not only the low-income workers who lack basic financial wisdom.

Eighty percent of Americans with nest eggs of at least $100,000 got an “F” on a test about managing retirement savings put together recently by the American College of Financial Services. The college, which trains financial planners, asked over 1,000 60- to 75-year-olds about topics like safe retirement withdrawal rates, investment and longevity risk.
Seven in 10 had never heard of the “4 percent rule,” which holds that you can safely withdraw that amount annually in retirement.
Very few understood the risk of investing in bonds. Only 39 percent knew that a bond’s value falls when interest rates rise – a key risk for bondholders in this ultra-low-rate environment.

If you fall into this category and want to find out what help is available, contact us. We’ll be glad to chat; no sales pitch and no pressure.

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Why employees need 401(k) investment advice

Employee Benefits News has an article with the headline explaining why employees need investment advice. Here’s their reasoning:

While American employees appreciate having a 401(k) plan, the majority will likely spend more time planning for a new car purchase or vacation than researching their plan’s investment options.
This retirement disconnect is not surprising, according to Schwab Retirement Plan Services, which released a survey this week of more than 1,000 401(k) plan participants. “We often see that participants are hesitant to take action when they’re not completely comfortable with the matter at hand, and this is especially true when it comes to financial decisions,” says Steve Anderson, head of retirement plan services at Charles Schwab.
Aside from health coverage, the survey found nearly 90{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93} of workers agreed that the 401(k) is a “must-have” benefit, more than extra vacation days or the ability to telecommute. However, employees said they spent more time researching options for a new car (about 4.3 hours) or vacations (about 3.8 hours) than researching their 401(k) investment choices (2.1 hours).

The article goes on to mention that more people get help having the oil in their car changed, mow their yard or prepare their taxes that planning how to invest their 401(k). This is a problem because changing your oil, mowing your yard, even doing your taxes, is easier than making wise investment decisions. For many people, their 401(k) is their biggest source of financial security for their retirement.

If you want to get the best out of your 401(k) think about getting the guidance of a professional. Contact an RIA.

10 Common Mistakes Made with Company Retirement Plans

Surveys say that most people don’t take full advantage of company sponsored retirement plans.
What are some of the most common mistakes?

1. Many people never participate at all, and others wait months or years to participate.
2. Failure to make enough of a contribution to obtain the full company match.
3. Failure to increase your contribution after getting a raise.
4. Failure to study the investment choices.
5. Putting too much of the money into company stock.
6. Failure to re-balance the portfolio on a regular basis.
7. Leaving the plan behind when changing jobs.
8. Failure to name a beneficiary.
9. Failure to review beneficiary information.
10. Cashing the plan out before retirement.

Common Retirement Investing Mistakes To Avoid

Planning to retire? Have all your ducks in a row? Know where your retirement income’s going to come from? Great! But don’t make some basic mistakes or you may find yourself working longer or living on a reduced income.

Retirement income is like a three legged stool. Take one of the legs away and you fall over.

Retirement Planning Mistakes

The first leg of the stool is Social Security. Depending on your income goals, do it right and you can cover part of your retirement income from this source. Do it wrong and you can leave lots of money on the table.

The second leg is a pension. Many people have guaranteed pensions provided by their employer. But these are gradually disappearing, replaced by 401(k) and similar plans known as “defined contribution” plans. If you don’t have a pension but want a second guaranteed lifetime income you can look into annuities that pay you a fixed income for life.

The third leg of the stool is your investment portfolio. This is where most people make mistakes and it can have a big impact in your retirement.

According to Forbes, the single biggest mistake that people make is “winging it.”

Operating without a financial plan and — maybe worse — having no idea how much they need to retire on ranks first because it can put investors years behind schedule.

Mistake number one is leaving “orphan” 401(k) plans behind as you change jobs. These plans often represent a large part of a typical retiree’s investment assets. Our advice for people who move from one company to another is to roll their 401 (k) assets into an IRA. This gives you much more flexibility and many more investment choices, often at a lower cost than the ones you have in the typical 401(k).

Mistake number two is trying to time the market. Many people are tempted to jump in and out of the market based on nothing but TV talking heads, rumors, or their guess about what the market is going to do in the near future. Timing the market is almost always counter-productive. Instead, create a well balanced portfolio that can weather market volatility and stick with it.

Mistake number three is “set it and forget it.” The biggest factor influencing portfolio returns is asset allocation. And the one thing you can be sure of is that over time your asset allocation will change. You need to rebalance your portfolio to insure that your portfolio does not becoming more aggressive than you realize. If it does, you could find yourself facing a major loss just as you’re ready to retire. Rebalancing lets you “buy low and sell high,” something that everyone wants to do.

Mistake number four is to assume that the planning process ends with your retirement. The typical retiree will live another 25 year after reaching retirement age. To maintain you purchasing power your money continues to have to work hard for you. Otherwise inflation and medical expenses are going to deplete your portfolio and reduce your standard of living. Retirement plans should assume that you will live to at least 90, perhaps to 100.

Other investing mistakes to avoid:

Starting too late. Market gyrations, fund fees and other costs cost you, but nothing compares to the cost of getting a late start on saving and investing for retirement
Heading into retirement with expensive mortgages,
Overlooking the free money from employer matching funds for 401(k) plans,
Failing to consolidate their accounts — increasing the likelihood that they’ll lose retirement money through forgetfulness, poor record keeping or clumsy tax planning.
The tendency among investors to put their children’s financial needs before their own. In other words, they’ll sacrifice their well-being in retirement for their kids’ education, living and sometimes even lifestyle expectations. In truth, not becoming a financial burden in old age is the most generous thing parents can do for their kids.

Retirement planning is complicated and is best done with the help of an expert. Reach out through our contact page and feel free to give us a call. We wrote the book on retirement and estate planning.

401k Distribution after Death

People who leave an employer frequently leave their 401(k) behind. Usually, the wise thing to do is to roll that 401(k) into a rollover IRA. But with so many other things to do when changing jobs, deciding what to do with the old 401(k) is often low on the list of priorities.

But there is another way of leaving an employer other than changing jobs. Some people die while still employed. And here is where the issue can get tricky.

When funds are left in a 401k after death, those must be distributed to the benefactor chosen by the participant. The way they are distributed depends on the choices of the company administering the 401k along with personal choices of the benefactor.
There are two rules that apply to an after-death distribution. One of the two must be used in all cases. The first allows for payments to be made within 5 years of the death of the participant. The second option allows a benefactor to received payments through his or her lifetime on a regular basis. The company administering the 401k may limit the option it will provide. Or, the benefactor may choose the preferred option. In any case, the election must be made by December 31 in the year of the death of the participant.

If the surviving spouse is not aware of this rule and decides to leave the 401(k) with the employer, it’s entirely possible that he or she will receive a check for the entire amount of the 401(k) five years after death, minus 20% federal tax withholding. If the amount in the 401(k) is substantial the entire amount may be taxed. It is possible to roll the proceeds into an IRA if it’s done in time, but to avoid paying an income tax on the federal tax that was withheld, the amount of the tax has to be added to the rollover. This creates a very unpleasant surprise for the surviving spouse.

401(k) Balances Hit Record High

From CNN

The average 401(k) balance hit $89,300 at the end of the year, up 15.5{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93} from $77,300 in 2012, according to an annual tally by Fidelity Investments. Most of the boost came from stock market gains as all three major stock indexes ended the year more than 20{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93} higher.
People on the verge of retirement, ages 55 to 64 years old, saw their nest eggs grow to an average balance of $165,200 from $143,300 in 2012, Fidelity said. Savers with both a 401(k) plan and Individual Retirement Account managed by Fidelity had larger nest eggs, with an average balance of $261,400, up from $225,600 in 2012.

The 401(k) has replaced pensions as the way most workers save for retirement. That’s a problem. Most employees spend almost no time actually choosing the right funds in their 401(k). It’s the reason that so many Enron employees lost their retirement when that company went broke. It’s the reason why so many people lost so much in the crash of 2008 – 2009.

Even when their 401(k) holds most of their retirement savings, employees pay little attention. The typical worker is given a list of mutual funds available to the plan and told to check off some boxes to say where his money is going to be invested. The employer does not provide guidance, neither does the investment firm that sold the plan. The typical “Big Box” broker is not paid to provide guidance, and typically doesn’t.

There is help for the worker who wants his money to grow while controlling risk. There are a few RIA firms that can help. If you are one of those whose 401(k) is serious money and you would like to get help, give us a call.

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Five things you need to do with retirement accounts

The average household is juggling no fewer than eight different retirement savings accounts, according to a recent survey. Many investors are looking to simplify their lives by consolidating at least some of those accounts. And nearly three-quarters of them consult with a financial advisor rather than seeking information from their employer, a fund provider or another source.

So what should you do if you have two, three or more retirement accounts? First you have to keep in mind the rules about rolling or transferring retirement accounts to avoid paying taxes.

First, find a financial advisor you can trust, preferably an independent RIA, who can give you unbiased advice and guide you to your goal. He should be able to create a retirement portfolio that’s designed just for your and will result in growth with the least amount if risk.
Second, make sure that assets from the various retirement accounts are transferred from custodian to custodian without passing through your hands to avoid taxes or penalties.
Third, make sure that fees are reasonable so that you, rather than the advisor, gets most of the gains.
Fourth, be sure that your advisor provides you with a performance review at least once a year so that you know how you are doing.
Fifth, remember that once you reach 70 1/2, you have to begin taking money our of your “regular” retirement account. If you have a Roth retirement account you can delay until you need the income.

For more information, contact Korving & Company.

“An existing relationship, lower fees and good product selection are the three top factors driving IRA rollover decisions for retirees and pre-retirees,” says the website. So, for example, advisors helping a retired client decide what to do with a lifetime’s worth of 401(k) plan assets — scattered over three or four accounts — should probably pick a fund company with which the client has already had a positive experience. Millionaire investors care even more about prior relationships than the less affluent, according to the research. But they’re less swayed by a famous name. Among survey respondents with less than $1 million to invest, 28% said they’d choose a firm with a well-known “retirement brand” when rolling assets over. Among millionaires, only 19% said brand is a priority.

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.

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.
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.
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.
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.
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.
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.

Tag: 401(k)