Options for Your 401(k) When You Change Jobs

401k

Leaving one job for another to pursue your goals, follow your passion, or just make some interim changes? As you leave – taking with you new experiences, knowledge, and relationships – don’t forget one more important thing: your company 401(k) account.

In the midst of job – or life – changes, it’s all too easy to get distracted and forget to pay attention to a 401(k) from a previous employer. It could be because the plan stops sending statements, or it could just be that you’re focusing on what’s going on in your life right now. There may even be a few you’ve lost track as the years pass.

Consider too, that even if you have kept track of your old 401(k) accounts and know exactly what’s in each of them, you many not realize that you have other options besides just leaving the account and investments as is. (For related reading, see: 6 Questions to Ask a Financial Advisor.)

Know What You Have

Do you know what’s in each of your 401(k)s? A recent study in the Journal of Finance has found that conflicts of interest in 401(k) plans can lead to serious opportunity cost for individual investors. Your managers may be prioritizing the profits of their institution by investing your money in their own funds, even if that is not the best investment option for you. As John Oliver recently demonstrated, these conflicts of interest can cost millions over the course of a single retirement plan’s life. Awareness is key. Make sure you look at old 401(k) statements from past employers to determine if they are being managed properly according to your needs and situation.

What Are Your Options?

If you do determine that your 401(k) plan from a previous employer is not being managed properly, or as beneficially to you as it could be, the good news is that you have options. You can roll the funds into a new employer’s 401(k) plan or into an IRA account that you already hold. Rolling over a 401(k) into an IRA has potential benefits that could include:

  • Lower management and expense fees
  • A wider range of investment options
  • Consolidating multiple accounts into one retirement account
  • The option to work with a fiduciary financial advisor with whom you are comfortable and whose recommendations are in your your best interest at all times

Can’t Find Your 401(k) Statement?

If you have lost track of an old 401(k) account, don’t worry, there are ways to search for it. Here are a few suggestions:

  • Contact your old employer’s HR department: if they can’t help you, they may be able to direct you to someone who can.
  • Search The National Registry of Unclaimed Retirement Benefits to see if your account is listed.
  • Ask your financial advisor to help you track it down.

A well-managed 401(k) plan can be the gift that keeps on giving. But once you’ve left a company, take a good look at your plan and decide if it makes sense for you to leave the funds there, move them into a current plan, or move them into an IRA where you, and a Fee-Only fiduciary financial planner, can take advantage of a broader range of investment choices.

This article was originally published on Investopedia.com

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The views expressed in this blog post are as of the date of the posting, and are subject to change based on market and other conditions. This blog contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Please note that nothing in this blog post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants, or attorneys regarding your individual circumstances and needs. No advice may be rendered by Sherman Wealth unless a client service agreement is in place.
If you have any questions regarding this Blog Post, please Contact Us.

Donald Trump Takes a Stand on 401(k) Investments

Head in the Sand - Trump 401k

GOP presidential nominee Donald Trump has had one of the most hectic campaigns in recent memory. He has made so many newsworthy remarks that it is hard to keep up. One day last week was particularly impressive as he made over 10 news-making assertions in under 24 hours. These included initially refusing to endorse House Speaker Paul Ryan, doubling down on his feud with Gold Star parents Khizr and Ghazala Khan and predicting that the election will be rigged. (For more, see: The Conflicts of Interest Around 401(k)s.)

Whether you support him or not, simply finding the time in the day to make all those remarks (and more) is impressive. But there was one opinion in particular that caught our eye, via CBS’s Sopan Deb. Trump made the below statements during an interview with FOX Business Network’s Stuart Varney:

Varney: For the the small investor, the average guy, right now, would you say, yes, put your 401(k) money into stocks?

Trump: No, I don’t like a lot of things that I see. I don’t like a lot of the signs that I’m seeing. I don’t like what’s happening with immigration policies. I don’t like the fact that we’re moving tremendous numbers of people from Syria are coming into this country and we don’t even know it. Thousands of people, thousands and thousands of people. There’s so many things that I just don’t like what I’m seeing. I don’t like what I’m seeing at all. Look, interest rates are artificially low. If interest rates ever seek a natural level, which obviously would be much higher than they are right now, you have some very scary scenarios out there. The only reason the stock market is where it is—is because you get free money.

Trump’s Approach

Even if you are his number one fan, please don’t hire Donald Trump to manage your 401(k). First of all, setting aside the economic truth of what Trump is saying and whether his fears will ultimately influence the market as much as he thinks, every factor that he mentions in his response is short-term. As Trump is 70 years old, focusing on what’s coming immediately down the line is understandable. But most investors have longer to go until retirement and therefore need to be invested in the stock market’s long-term gains, particularly those investors without Trump’s level of wealth. (For more, see: Why Playing It Safe Could Hurt Your Retirement.)

As Bloomberg points out, Trump’s strategy basically amounts to timing the market. We believe that in the long run, due to the efficient market hypothesis, you can’t beat the returns of the market through individual stock selection and market timing. Therefore, the safest thing to do is to stick with the market, while of course monitoring constantly and rebalancing.

Trump’s approach could be a recipe for long-term disaster. Fidelity Investments has compared how investors who pulled out of the market near its bottom in 2008-09 fared versus those who stayed. Those investors who stuck with the market ended 2015 $82,000 richer than those who withdrew, on average. (For related reading, see: Why Investors Can Be Their Own Worst Enemy.)

So even if Trump is completely correct, it is not a good strategy for a long-term retirement saver, which is the demographic he was asked about. If Donald Trump applied his advice to your 401(k), you’d probably do worse than if you ignored him, even in the case of a market correction.

Asked about alternatives to the stock market, Trump would likely point to real estate (we wrote about that here), which is where most of his dealings have been. The answer is somewhere in between a diversified portfolio with investments in real estate (if you can afford it), but also stocks, bonds, the money market, etc. If a market correction really is coming as Trump predicts, then the best hedge against it isn’t to pull all your money out of equities. Rather, for most savers, we think the best protections are a long-term financial plan and a diversified portfolio, both of which account for short-term market volatility.

This article was originally published on Investopedia.com

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The views expressed in this blog post are as of the date of the posting, and are subject to change based on market and other conditions. This blog contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Please note that nothing in this blog post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants, or attorneys regarding your individual circumstances and needs. No advice may be rendered by Sherman Wealth unless a client service agreement is in place.
If you have any questions regarding this Blog Post, please Contact Us.

 

The Conflicts of Interest Around 401(k)s

401k

A new study in the Journal of Finance has found that conflicts of interest in 401(k) plans can lead to serious losses for individual investors. More specifically, the 2,500 funds surveyed were less likely to eliminate underperforming funds that were their own rather than another provider’s fund. This can be very costly to retirement savers. Clemens Sialm, a professor of finance at the University of Texas at Austin and one of the study’s authors, explained that the bottom 10% of funds continued to underperform by about 4% if kept on the menu of funds available to investors.

With all of the attention lately focused on reducing these conflicts of interest where financial managers invest your money in their own funds (among individual financial advisors rather than institutional), it is surprising to see the bias getting coverage on an institutional level. As of June 2015, $4.7 trillion were invested in 401(k) accounts, plus another $2.1 trillion in non-401(k) defined-contribution plans. As John Oliver recently detailed, these conflicts of interest can cost millions over the course of a single retirement plan’s life. (For related reading, see: Financial Failings of NBA Legend Antoine Walker.)

Why the Conflicts Exist

The reason for the existence of these conflicts of interest is simple. Managers are prioritizing the profits of their institution over the success of the retirement plans they oversee. And there is no question that it is a raw deal for the investor. We’ve previously covered how many actively managed funds don’t even beat the market in the first place, and this study confirms that failing funds aren’t even taken off the menu of options. Imagine if your local restaurant kept undercooking their chicken and everyone was getting sick, but they refused to change the recipe.
Many employees at big asset management firms are now suing their own companies to liberate their own retirement plans from management. These people know it’s a scam, and God forbid that their own money gets caught up in it, but by and large they are OK with selling you inefficient funds. (For related reading, see: 6 Questions to Ask a Financial Advisor and Do You Need to Change Your Financial Advisor?)

These current events—and the study—indicate that conflicts of interest are pervasive in all aspects of the retirement planning industry, whether it’s a 401(k) through your employer or via traditional financial advisors. Dealing with this reality requires vigilance on your part. To return to the analogy of the undercooked chicken, it would be an easy case to deal with since everyone could tell that the chicken was making them sick. But what allows traditional asset companies to get away with conflicts of interest is that many people are simply too busy to monitor their accounts—that is, to find out if they are sick or not. If the undercooked chicken gave you an illness that was hard to detect, it would be much easier for the restaurant to get away with it.

Luckily, the tide is beginning to turn, and you can impact change, even with your 401(k). You should become an advocate for your own money. Contact your HR department and ask to see the performance of the menu of funds. See who’s managing it, how the menu has changed and evaluate the extent of conflicts of interest.

Ultimately, independent, conflict-free advice and management is the best cure for the industry’s problem. (For related reading, see: Why Investors Can Be Their Own Worst Enemy.)

This article was originally published on Investopedia.com

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The views expressed in this blog post are as of the date of the posting, and are subject to change based on market and other conditions. This blog contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Please note that nothing in this blog post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants, or attorneys regarding your individual circumstances and needs. No advice may be rendered by Sherman Wealth unless a client service agreement is in place.
If you have any questions regarding this Blog Post, please Contact Us.

4 Things You Can Learn From John Oliver About Retirement Planning

On his HBO show Last Week Tonight, comedian John Oliver recently turned the national spotlight on the wealth management and retirement planning industry. In light of a new Department of Labor rule requiring all financial advisors to act as fiduciaries for retirement accounts, in which we strongly believe, Oliver skewered the opaque tendencies of brokers and traditional financial advisors. He urges viewers to bring their business to a transparent fiduciary who has your best interest at heart.

Oliver’s segment serves an important purpose — many regular people who trust a traditional financial advisor with their money, or millennials who are just now beginning to think about retirement planning, simply don’t know the many ways the advisor could be robbing them of their hard-earned money. While not everyone is as clueless as the woman whom Oliver ridicules for asking CNBC host Suze Orman whether she should spend $4,000 to get an elf-spotting certification in Iceland, the many ways traditional financial advisors hurt their clients are often hidden unless the client does the digging themselves. With that in mind, here are four major takeaways from Oliver’s monologue.

1. Many financial advisors may not have your best interest at heart — but you can find one who does.

As Oliver notes, “financial advisor” is a vague term. Even so, many traditional financial advisors  are not fiduciaries, and instead operate on commission. (An advisor who is a fiduciary must always act in the best interests of you, the client.) This means they can execute trades and strategies that line their own pockets with little regard for your financial well-being. We believe that this is unacceptable; as a result, we operate as a fee-only fiduciary that does not receive any sort of commission. While some advisors make money by endorsing a particular investment or product to their clients, we are paid only by our clients.

2. The “active management” of many funds and advisors can destroy your capital.

As we’ve previously detailed in this blog, you shouldn’t expect to win with actively managed funds. Not only do these funds fail to outperform the market, but in doing so they also accrue massive fees due to the large amount of trades they are making. While compound interest grows your investment over time, interest isn’t the only thing that compounds — fees do as well. Oliver cites a study in which an index of stocks, selected by a cat throwing a ball at them, outperformed an actively managed fund overseen by experts. The cat earned returns of 7%, while the pros garnered only 3.5%. Oliver summarizes the situation succinctly: “If you stick around doing nothing while everyone else around you [messes] up, you’re going to win big.” At Sherman Wealth Management, we believe sticking with investments that focus on low cost and tax efficiency is the best way to save for the long term. ETFs are an investment vehicle that we utilize to accomplish this goal.

3. It doesn’t have to be this complicated, and it might be getting simpler.

There are easy steps you can take. Start saving now — it’s never too early. When screening financial advisors, ask if they are fiduciaries. With your money in the hands of a fiduciary who puts your best interest first, you can be confident in your advisor’s motivations. 

Feel like the little guy/girl who can’t get the time of day from your “financial advisor”? Read our post – Why Go Where Your Money’s Not Wanted?

4. These principles aren’t abstract — they have real consequences for real people, like you.

To demonstrate all of this, Oliver examined the 401k his own employees at HBO were using through their provider. The retirement fund charged 1.69% fees, and their broker refused to offer low-cost, low-fee plans. The advisor even messed up the calculations on the compounding interest, making his original math off by over $10,000,000. These are not the actions of someone who values his/her clients more than a paycheck; on the other hand, we value our partnership in our clients’ future success.

Where Oliver went wrong is when he questioned why anyone would invite their financial advisor to their wedding. We are proof that a relationship like that is possible between client and advisor. As a fiduciary, when we consistently act in the best interests of our clients, we end up building strong friendships with them.

At Sherman Wealth Management, we have long been at the forefront of the fiduciary movement for transparency and conflict-free advice. At a traditional insurance company or wire house, advisors will often recommend expensive funds produced by their institution; on the other hand, we can take a more holistic view of investments to determine which are best for you. We believe in growing with you, not at your expense.

We encourage you to trust your retirement to an advisor who will act only in your best interest. Curious what that looks like? Schedule a free portfolio analysis and strategy session with us.

Check out the full John Oliver video here.

 

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The views expressed in this blog post are as of the date of the posting, and are subject to change based on market and other conditions. This blog contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Please note that nothing in this blog post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants, or attorneys regarding your individual circumstances and needs. No advice may be rendered by Sherman Wealth unless a client service agreement is in place.
If you have any questions regarding this Blog Post, please Contact Us.

7 Tips to Maximize the Value of a Bonus or Raise

Dock

Expecting a bonus or a raise? Read these tips before you start Googling timeshares in Cancun

If you’ve got an end-of-year bonus or a well-deserved raise coming, it’s easy to think of it as “extra money” you can use to splurge on a trip to Mexico, a new phone, or a serious visit to the outlet stores. It’s particularly easy if you’ve been sticking to your budget and feel you deserve a little fun after behaving so responsibly all year!

Before you blow that bonus on a phone upgrade or a cruise, though, consider these smart ways to really reward yourself with the extra infusion of resources.

1. Upgrade Your Budget Instead of Your Phone

Still rocking a flip phone from the 90s? If so, yes, maybe you should invest in something smarter. But for most of us, it’s smarter to spread the extra cash across several budget items. Go ahead and add a little to your entertainment or entertaining budget, but consider allocating the rest of it to these smart ideas!

2. Make a Bigger Dent in your Debt

Are you feeling the weight of college loans, a mortgage, or, even worse, high interest credit card debt? You can lighten that load by using your bonus to make a larger payment than usual. It lowers your balance so it reduces some of those high interest charges moving forward. Increasing this budget category when you get that raise can also add up to a significant reduction of interest in the long run.

3. Invest to Watch it Grow

Setting aside money when you have large expenses to deal with now can be daunting. But the earlier you start investing the more time your money has to grow. If you haven’t already, create an investment account and put that bonus money to work for you, instead of leaving it in a checking account.

4. Kickstart Retiring

If you’ve kicked your tires and they need to be replaced, by all means, safety first! Use some of the rest of the money, though, to max out your company’s 401(k) contribution limits. If you qualify for an employer match, your bonus just got bigger!

5. Recalibrate Your Portfolios

If you’re already an investor, consider adding some of those extra funds to your investment portfolios. While you’re at it, take a look and see what’s working and what’s not. Your financial advisor can help you evaluate whether your allocations should be adjusted based on your risk tolerance and your long and short-term financial goals.

6. Start a College Savings Plan 

It’s never too early to start saving for a child’s college education. By starting early, you can get a good head start and maximize compounded interest. Your financial advisor can help you choose a plan that works with your life, you goals your timeline, and, most importantly, your bonus!

7. Save for a Rainy Day

Those emergency funds may seem like low priority, until you suddenly need them. If you haven’t already, create an account with funds for unexepected expenses like job loss, emergency repairs, medical bills for you, your family, or your pets, and even weather emergencies (remember Hurricane Sandy?) A good rule of thumb is to have three to six months of expenses saved up just in case.

There’s nothing wrong with treating yourself a little. You worked hard and you deserve it! Remember though, that by keeping the splurging and celebrating to a minimum, and letting that bonus or raise work for you, chances are you’ll have much more to celebrate when next year’s bonus comes around!

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The views expressed in this blog post are as of the date of the posting, and are subject to change based on market and other conditions. This blog contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.

Please note that nothing in this blog post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants, or attorneys regarding your individual circumstances and needs. No advice may be rendered by Sherman Wealth unless a client service agreement is in place.

If you have any questions regarding this Blog Post, please Contact Us.

Should You Start to Save… or Pay Down Debt?

Pay Down Debt

Millennials have an entrepreneurial spirit and tend to have a lot on their plates. Being able to juggle several balls in the air and multi-task is par for the course for this generation. So why do Millennials often struggle with how to prioritize between saving for the future and paying down debt?

Many Millennials still have college loans to pay off or have acquired credit card debt while taking home minimal starting salaries. And advice about how to get started is confusing: some financial professionals recommend having at least one month of income saved prior to starting to pay down your debt, while others recommend up to 8 months of savings. That’s a daunting prospect when you’re young and living from paycheck to paycheck!

Because of the power of compounding interest, the 20s and 30s are your prime savings years. Not taking advantage of the opportunity to save now may end up costing you later. So how can you start to build your savings and pay down debt, while still maintaining a reasonable quality of life?

The good news is that – because they’re used to a struggling economy – Millennials have become very resourceful when it comes to finances. Here are several factors to consider when you’re deciding how much you can – or even if you can – allocate for both.

Three Questions to consider about saving vs. debt:

What is my monthly incoming & outgoing cash flow? Hopefully it’s not negative! If it is, though, try to find daily and household expenses that can be trimmed or eliminated (that venti caramel latte? An expensive cable package?) If it’s positive, determine if there’s enough left over to pay credit card minimums while allocating a portion, however small, toward a saving plan.

What is the interest rate on my debt? Debt with an interest rate of higher than 5% is a priority to pay down, otherwise you’re spending your hard-earned cash on borrowing costs. Can you roll over your debt to a lower-interest or zero-interest credit card? If not, create an action plan to pay off high-interest debt first. If you have debt with interest rates that are lower than 5%, consider contributing to a 401K or a Roth IRA. The same way interest compounds with your debts, it also grows with your savings, so the sooner you take action, the more you will gain over time.

What is my stress level regarding debt? If the stress of having debt is overwhelming, then make paying the debt before contributing to your savings a priority. If your debt seems manageable, start getting in the habit of making monthly contributions to a savings plan.

Remember, no two people, and no two financial plans, are alike. Whether you can contribute to a savings plan and pay down debt simultaneously depends on you and your unique situation. Talking to a financial advisor can help put you on a path that is right for you. The important thing is to create a goal and a plan!

Learn more about our Budgeting and Savings planning.

Related Reading:

What’s your Credit Score?

Brad Sherman is a financial planner who is committed to helping individuals and families achieve financial independence and gain confidence with regard to financial issues.

Call or contact him today to see if his services are a good fit for your needs.

LFS-989662-081314

Navigating the Stock Market: Tips for Millennials

Understanding the Stockmarket

Navigating the stock market can be daunting for anyone, especially if you’re new to investing.

Between struggling to pay off student loans, finding jobs in a difficult market, and setting goals for financial independence in a stressed market environment, it’s been a daunting few years in general for many Millennials, who may have put off investing because they just don’t feel comfortable or ready.

Feeling comfortable with investing – and understanding how the stock market works – is critical, however, as you start gaining independence and start making important financial decisions. If you get started now, you’ll be maximizing your chances of hitting those marks on your way to achieving your goals!

Here are some basic tips to help you get started.

7 Tips For The Long Term Investor

Start today: Procrastination can put a large dent in your ultimate savings. Whether you’re investing in a retirement savings plans or a regular investment account, it’s important to start early so that your investments compound. Remember, even small amounts add up over time!

Create a plan and stick with it: There are many ways to be successful and no one strategy is inherently better than any other. Once you find your style, stick with it. Bouncing in and out of the market makes is just as likely you will miss some of the best days and hit the worst.  Readjust your portfolio when necessary, but not too often.

Think long term and be disciplined: Be prepared to buy and hold your positions. Big short-term profits can be enticing when you’re new to the market but short-term wins will get you off track. Start a program, stay invested, and don’t be too concerned with day-to-day profits and losses.  Warren Buffet once asked, “Suppose you’re going to be investing for the next several years. Do you want the price of the stocks to go up or down?” While everybody assumes it’s “up,” in reality, it’s only people who are withdrawing in the near future who really want stocks to go up!

Do your research: Always be an informed investor. Do your own due diligence with companies you’re interested in. Don’t go for a ‘hot tip’ just because there’s a lot of buzz; research companies, get advice, and decide if they’re investments that are right for you.

Never let your emotions influence you: The markets move in cycles. When the markets are up, we feel elated about our investment decisions. When markets start to move down, we may experience anxiety and panic. Reacting emotionally can lead to spur of the moment decisions that don’t benefit you in the long run. Again: think long term.

Always have a margin of safety: The first rule anyone new to investing needs to learn is that there are no guarantees in the stock market. An investment that looks great on paper does not always pan out in real life.  Know how much risk you are willing to take and make sure your investments are aligned with your risk tolerance.

Diversify: Never put all your eggs in one kind of basket. It’s important to make sure your portfolio includes both stocks and yield-producing assets, such as bonds, to cushion you against market volatility. Diversification doesn’t just mean investing in multiple companies either; investigate ways to invest in different markets, bother national and international, as well.

One final tip: find an experienced financial planner you trust, who “gets” you, your goals, and your timeline, and who can guide you as you invest in your future.

Brad Sherman is a financial planner who is committed to helping individuals and families achieve financial independence and gain confidence with regard to financial issues.

Call or contact him today to see if his services are a good fit for your needs.

Related Reading:

What is Dollar Cost Averaging?

5 Things Investors Get Wrong

5 Big Picture Things Many Investors Don’t Do

Why and How to Get Started Investing Today

Mitigating Your Investment Volatility

The Psychology of Investing

Rebalance Your Portfolio to Stay on Track With Investments

Behavioral Investing: Men are from Mars and Women are from Venus!

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Advantages of Participating in Your Workplace Retirement Plan

Our Clients

As young adults, 20 and 30-year-old’s tend to procrastinate when it comes to saving for retirement, thinking they have all the time in the world.But the key is to start now. When it comes to saving for retirement, there are few better ways than a workplace plan such as a 401(K). Yet, there are a few common excuses for not opting into an employer compensation plan.

● There will always be Social Security
● I can’t afford it right now. I’m not making enough money to save yet.
● Fear of losing money in bad investments.
● I’m so young, I have all the time in the world.

The 411 about the 401(K)
A 401K allows employees to withdraw money from their paycheck prior to taxes and invest it in a retirement savings plan. Many employers then match the contributions proportionately, sometimes even dollar for dollar. The contributions are not taxed until the money is withdrawn. As of 2014, you can contribute up to $17,500 per year.

Funds withdrawn prior to age 59 ½ are subject to a 10% penalty and are taxed as current income in the year withdrawn.

A Mini History Lesson about Pensions and Employer Compensation Plans
It was during the American Revolution, that what we know as a pension, came about. The Continental Congress offered soldiers a monthly lifetime income as an incentive to join General Washington’s army.The income they’d receive when the war was over would be a payment for their service.This lifetime income was called a pension.The offer was repeated by the federal government the during the Civil War and has continued ever since.

The first private company to offer a pension plan was American Express in 1875. They gave an income to each retired employee. The amount was equal to half of the worker’s annual pay, based on an average of the worker’s final ten years of employment (up to $500 annually). Over the next 50 years, hundreds of other companies created similar plans. (However, now it’s based on the average of the worker’s highest paid income of 35 years!)

The end of 1929 brought the Great Depression. Millions of people became unemployed which created fierce competition for jobs.The nation’s economy at the time was agricultural and industrial— both very physically demanding— placing older Americans at a distinct disadvantage. So when older employees lost their jobs, they were unlikely to find new ones and found themselves involuntarily retired.

Thus, in 1935 came the Social Security Act which was signed by President Roosevelt,establishing the first public retirement plan and a national retirement age of 65.Similar to the private plan created by American Express, Social Security was to pay monthly benefits based on each worker’s length of service and average annual salary.

Addressing the Excuses

There will always be Social Security
When the Social Security Act was established, the average American lifespan was 61.7 years, however, today it is 78 years. Now, one must plan income for retirement to get you to age 100 or beyond. You can no longer solely rely on Social Security alone to maintain you through your retirement years. It should only provide you with one-third of your retirement income.

Few companies still maintain traditional pensions (paid for by employers). In this day and age, people are no longer staying at one place of employment for their entire career which is usually the case in which a pension would still exist. The vast majority of today’s retirement plans fall under “defined contribution plans” such as the 401(K).

I can’t afford it right now. I’m not making enough money to save yet.
You do not have to make a lot of money to participate in this program. Typically an employer only requires 1-2% of the participant’s salary. On a $50K salary, that is only $42 to $84 per month. And remember, your employer may contribute proportionately every time you do. How much do you spend on your cable bill? Or phone bill? Or your gym?

Your employer automatically deducts your contributions every time you are paid. If you don’t see the money, it won’t be so hard to part with it! Most of the legwork to provide investment options is done by your employer and the professional advisers they hire to assist them. An increasing number of plans offer “auto enroll” and “auto escalate” features. The first automatically signs you up for your retirement plan; the second automatically boosts contributions as your salary increases.

Another perk: You get two tax advantages when you save in a 401(K) plan. First, your contributions are tax-deductible. Second, the money you contribute doesn’t count toward your gross income for the year, lowering your taxable income. There are also no taxes on interest or dividends at the end of the year like in a non qualified investment or savings. Say you put 10% of your $50,000 salary into your account each month. That’s $416 you don’t have to pay tax on. If you’re single, that translates to about $104 in monthly tax savings, or $1,245 a year and tax deferred until its withdrawn.

Fear of losing money in bad investments.
Sometimes taking your hard earned money and putting it where you can’t see it is scary. People who have fear of going to the doctor but have to go anyway. Think of it the same way. Most 401(k)s let the employee choose where to invest their savings from a variety of options ranging from aggressive choices as to less volatile choices.

I’m so young, I have all the time in the world.
The key to success of a 401(K) is to start as early as possible and to try and contribute the maximum allowed. According to FinancialSamurai.com, in 2014, if a 22 year old started participating in a 401(K) by the time they are 65, they will have saved $743K to $3.5 million, depending on the percentage of contributions to the plan. But if someone does not start contributing until age 40, by the time they are 65, they will have saved $305.5K to $550K, depending on the percentage of contributions to the plan. Wouldn’t you prefer to be the former?

Don’t leave money on the table. If your company offers a 401(K), find out the details of the plan and consider taking advantage today.

Learn more about our Retirement Planning services.

Related Reading:

Four Things Entrepreneurs Can do Now to Save for Retirement 

Finding Financial Independence

YOLO (You Only Live Once) so you Need a Retirement Goal

Your 401K Program: A Little Savings Now Goes a Long Way

How Much Money do you Need for Retirement These Days?

The Benefits of Saving Early for Retirement

 

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