What To Do and Mistakes To Avoid With Your Old 401(k)

Have you recently left a job, been laid off, or just started a new one? If so, you’re not alone in wondering what to do with your old retirement accounts. This is a crucial topic that often gets overlooked due to a lack of education about the available options, causing many people to lose track of their old accounts or make hasty decisions. Some feel the need to cash out their savings when they leave a job, while others leave a trail of 401(k) plans behind as they move from job to job. We’re writing this to help you avoid common mistakes that can be made when you deal with your old retirement accounts and to educate on your options.

1. Avoid Cashing Out Your 401(k)
When leaving a job, resist the urge to cash out your 401(k). Cashing out can be costly, both immediately and long-term. You’ll face income taxes and a 10% early withdrawal penalty if you’re under 59 ½. More importantly, you’ll lose the future growth potential of your retirement savings.

2. Be Cautious with Rollovers
If you decide to move your 401(k) to another plan or an IRA, you have two main options: direct transfer or rollover. A direct transfer is generally the safest method to avoid penalties. If your employer sends a check, you have 60 days to roll it over into an IRA or another qualified plan. Missing this window can incur penalties, and you’re only allowed one grace period every 12 months.

3. Consider the Benefits of an IRA
Moving your money into an IRA can consolidate your retirement savings and provide more flexibility. Unlike 401(k) plans tied to an employer, a self-direct IRA can offer a broader range of investment options. However, some employer plans offer valuable investment options and pricing that might not be available with an IRA, so it’s important to compare before making a decision.

4. Explore Tax Strategies
Don’t overlook potential tax strategies during a job change. Converting your savings to a Roth IRA could be beneficial; you’ll pay taxes on the conversion now, but future growth and withdrawals will be tax-free. If your income is lower that year, the tax impact will be reduced. Additionally, if you have employer stock in your 401(k), there may be opportunities for tax breaks when you leave the job.

5. Regularly Review Your Accounts
As you transition to new employment, take the time to evaluate and consolidate any old retirement accounts. Keeping track of your investments is essential to ensure they align with your long-term goals and all your accounts are working together in a global allocation.

As we get ready to transition to fall, use this opportunity to evaluate and understand what old accounts you have, if any, and your options to consolidate them. Keeping regular tabs on what is going on with your investments is critical to ensuring they line up with your goals for the future, as your old accounts may not reflect your current risk tolerance and align with your proper allocation. For more personalized advice on managing your old retirement accounts, feel free to reach out to us at info@shermanwealth.com.

It’s Time to Re-Visit Your Protection

As we are now approaching the back half of the year, we’ve been working on mid-year reviews with lots of clients and families to benchmark and tweak their financial plans. While many are getting their finances in order for the second half of the year and benchmarking where they are in reaching their financial goals, I want to bring light to a topic that many individuals often miss during their annual check-ins: Protection.

In our busy everyday lives, we often get caught up in the excitement of pursuing our dreams and goals. While it’s essential to focus on our ambitions, it’s equally important to take proactive steps to protect ourselves and our loved ones. From unexpected medical emergencies to securing our assets, this blog highlights the critical significance of having a comprehensive protection plan in place, including adequate insurance, whether its life, disability, homeowners, umbrella, auto or more, and an estate plan, including a will, medical directive, and power of attorney. If you haven’t already, now is the time to reach out to a trusted professional to find out what your options are when it comes to life insurance and re-visiting your estate plan . 

Each year, you should get an annual health checkup with your doctor to make sure you’re in good shape physically. The same thinking applies to your life insurance policies. You may find that you have adequate coverage, but it’s always important to revisit it each year. Your financial advisor or insurance provider can help you decide what type of strategy you should pursue when it comes to your life insurance policy.

We find that many individuals have a “set it and forget it” mindset when it comes to insurance and estate planning, but that mindset is not in your families best interest. You may have purchased an old life insurance policy years ago that no longer meets your needs or you haven’t updated your will since the recent tax code changes. There are tons of reasons why you should re-visit your protection plans annually. 

Keep in mind the importance of protection for your family and remember to check in with your agent, lawyer or other trusted professional at least once a year to see if you can benefit from a reassessment. In some instances, you may be able to pay less for a similar policy or obtain a policy with a higher value for the same cost or less based on the current rates. If you have any questions, please let us know and we are happy to help. Reach out to us at info@shermanwealth.com or sign up for a complimentary 30-minute consultation here.

Ep. 195 Launch Financial- Q2 Earnings Season in Full Swing

Overview: Tune into this week’s episode of Launch Financial as we unpack a great deal of news in the media along with a big rally in the stock market, with all major averages pushing towards record highs. All eyes will continue to be on earnings season along with more rhetoric from the Federal Reserve on the future of interest rate cuts and policy. 

 

Show Notes: 

Check out this episode!

Navigating the Economic Landscape of Higher Interest Rates

Interest rates play a pivotal role in our financial lives, influencing everything from mortgages and car loans to savings accounts and credit card debt. The financial landscape is constantly evolving, so it’s important to continually digest how the current landscape is impacting the consumer. A year ago in May, the Federal Reserve set their target interest rate above 5%, and have been raising interest rates through various interest rate hikes over the course of the year. In turn, the consumer has had to adapt to not only a higher cost of living due to rising inflation, but also a higher interest rate environment. Now, as we look to the Federal Reserve for upcoming interest rate cuts, let’s take a look at how higher interest rates have impacted the consumer over the past year, and strategies to keep in mind.

  1. Borrowing Costs

When interest rates rise, borrowing becomes more expensive. For those considering big-ticket purchases like homes or cars, this means higher monthly payments. Existing adjustable-rate mortgage holders may also experience increased payments as their interest rates adjust upwards. It’s crucial to factor in these potential costs when planning major financial decisions.

  1. Savings and Investments

While higher interest rates might make borrowing more costly, they can also benefit savers and investors. High Yield Savings accounts, certificates of deposit (CDs), Treasury notes and bills, and other fixed-income investments often yield higher returns in a rising rate environment. This is great news for those with substantial savings, as they can expect better returns on their cash.

  1. Credit Card Debt

On the flip side, if you carry credit card debt, a higher interest rate environment can be detrimental. Credit card interest rates are often variable and tend to rise alongside broader interest rate trends. This means that paying off credit card balances promptly becomes even more important, as carrying a balance will result in more significant interest charges.

4. Refinancing Opportunities

For those with existing loans, a higher interest rate environment can reduce the incentive to refinance. However, it’s essential to analyze the situation carefully. If you have a fixed-rate mortgage, you’re shielded from rate hikes. But if you have an adjustable-rate mortgage, it might still be worthwhile to explore refinancing options if rates remain relatively low. We have also seen clients explore 0% interest rate credit cards that are still available as a financing option on for upcoming goals and expenses.

5. Flexibility and Planning

The key to thriving in a higher interest rate environment is adaptability and thoughtful financial planning. Create or update your budget to account for potential increased expenses, save more diligently, and consider refinancing or consolidating high-interest debt to lower your interest costs. We’ve seen interesting articles from consumers stating that they are finally feeling the sting of inflation and higher cost of living. If you too are feeling the impact of inflation and higher interest rates, it may be time to revisit your budget and spending.

A higher interest rate environment is a financial landscape that impacts us all, whether we’re borrowers, savers, or investors. Understanding how it affects your wallet and taking proactive steps to adjust your financial strategy can help you navigate these changes successfully. Stay informed, make prudent financial decisions, and seek advice from financial experts if needed to ensure that your wallet remains resilient in the face of rising interest rates. If you have any questions about the current economic environment or are seeking tips to enhance your financial plan and routine, email info@shermanwealth.com  or schedule a complimentary intro call here.

Your July Financial Checklist: Keeping Your Financial Plan on Track

Happy July everyone.  As summer is well underway and we have surpassed the mid-way mark in the year, it’s a great time to take a step back and evaluate your financial health. With vacations, barbecues, and outdoor activities in full swing, it’s easy to lose track of your financial goals. Here’s a consolidated checklist to help you stay on top of your finances this July.

Mid-year is a perfect time to revisit your budget and see how you’re doing compared to your financial goals set at the beginning of the year. Here’s how to effectively benchmark your budget:

  • Track Summer Spending: Summer often brings unique expenses, such as vacations, outdoor events, and even often times higher utility bills. Review your spending in these categories and compare them to your currently monthly budget
  • Adjust for Seasonal Expenses: If you find that your summer spending is higher than anticipated, consider adjusting other areas of your budget to accommodate these seasonal expenses.
  • Evaluate Monthly Trends: Now that you have had several months under your belt to review cash flow and spending, look at your spending over the past six months to identify any trends or areas where you might need to cut back.

Whether you’re saving for a new car, a house, or simply building an emergency fund, July is a great time to assess your progress:

  • Emergency Fund: Do you feel comfortable with the level of your emergency fund? If not, prioritize building this fund.
  • Short-Term Savings: If you have specific savings goals (e.g., a holiday fund or home project), ensure you’re on track to meet them.
  • Automate Savings: Consider setting up automatic transfers to your savings accounts to ensure consistent progress.

Retirement might seem far off, but consistent contributions are key to a successful retirement plan. July is a great month to check in on where your contribution is at for the year and decide if you’d like to increase your monthly contribution or are on pace to max out your contribution if you intend to.

  • 401(k) and IRA Contributions: Check if you’re on track to maximize your contributions for the year. The 2024 contribution limit for 401(k) plans is $23,000 (or $30,500 if you’re 50 or older), and for IRAs, it’s $7000 (or $8,000 if you’re 50 or older).
  • Employer Match: If your employer offers a matching contribution, ensure you’re contributing enough to get the full match—this is essentially free money.
  • Rebalance Investments: Review your retirement account’s investment allocation and rebalance if necessary to align with your risk tolerance and retirement goals.

Summer is the time for fun, but fall and winter bring their own financial demands. Plan ahead to avoid stress:

  • Back-to-School Costs: If you have children, start budgeting for school supplies, clothing, and extracurricular activities.
  • Holiday Spending: Utilize the “bucket strategy” and begin setting aside money for holiday gifts, travel, and events to avoid last-minute financial strain.
  • End-of-Year Goals: Think about any other financial goals you’d like to achieve by the end of the year and start planning accordingly.

Lastly, despite busy summer plans and travel, it’s important to revisit and update your financial plan, particularly halfway thru the year. Your financial plan should be a living document that evolves with your life circumstances. If you are interested in re-visiting or even creating a financial plan, email info@shermanwealth.com or schedule a complimentary intro call here and we are happy to help. Remember, financial planning is a continuous process, and regular check-ins are key to staying on track.