Retirement Guys: The 401(k) of the 21st centuryWritten by Nolan Baker Mark Clair | | firstname.lastname@example.org
Memorial Day has come and gone. It leaves many of us with great memories spent with family and friends. Pictures and videos of veterans and active duty soldiers were everywhere on social media, television and the radio.
Watching all the media coverage of veterans in their prime brought back fond memories for many Americans on what retirement used to be like. Back in the day, you could count on a monthly pension check if you worked hard, showed up on time and were loyal to one company. Those days, for the most part, are long gone.
The 401(k) of the 21st century has employers shifting the responsibility to save for retirement to the employee. It has become the “go to” savings vehicle for most people today. Although getting a lifetime of income for working for a company may seem like a perfect retirement, a 401(k) can actually be a better option if you are a wise saver and investor. Here is some advice on where you might find some opportunities and traps to avoid.
In a defined benefit pension plan, when you worked for a company they gave you a set amount of income for the rest of your life. You didn’t need to do anything but work for the same company for a long time. That type of retirement worked great for an employee who worked for a company for a long time.
Today employees change jobs a lot more often. That might be bad news for an employee who is trying to build up a pension, but good for employees who have a 401(k). The 401(k) is a portable investment. You can always take your money with you and depending upon the vesting schedule of the company you can get some or all of their contributions as well if you leave.
An employee with a 401(k) with a balance over $5,000 can leave the money in the current plan or with any balance can move the money. If the person starts a job at a new company that offers a 401(k) plan the money from the old plan can be transferred over. This can be a good option to consolidate accounts and to take advantage of 401(k) options like loan features. The other choice is to move the money to a self directed IRA. This can give the account owner a lot more flexibility over various investment choices.
In most cases an employee who saves in a 401(k) gets free money. A recent study showed that 95.3 percent of plans made a matching contribution in 2012. (Plan Sponsor Council of America, 56th Annual Profit Sharing and 401(k) Survey, Oct. 17, 2013). That means in most cases it is a no-brainer to start saving right away in the company sponsored retirement plan.
Pay attention to “hidden” fees that can eat away at your returns. In the past 10 years, one of the most popular investment choices has become target date retirement funds. “Investors have poured relentlessly into target-date funds, with assets now topping $481 billion, up from $71 billion in 2005, according to the Investment Company Institute.” This may seem like a simple and easy choice to pick, but it could be a costly mistake once an investor adds up all of the internal expenses. Indexed funds can be a good way to save in expenses. It might take a little bit more work in the beginning picking out a diversified portfolio, but the cost savings in the long run can be well worth the time. If you need help picking out investments get professional advice or use services like what we offer at www.401kinvestmenthelp.com.
Know your risk level before a crash occurs. To be successful in investing buy low and sell high. It sounds easy, emotions can cause people to sell when the performance is bad and buy when everything is going good. This can be a disaster when it comes to investing. The best thing to do is while things are doing great, like right now, is to figure out what your risk is. It is a lot better to focus on this now before the market downturn happens. And yes it will happen.
You might have more choices than you knew. In the past few years, several 401(k) have begun to offer self-directed investment options. This can open up a whole new menu of investment options to allow the account owner a customized plan. Also, many plans allow an account owner over the age 59 ½ to do an in service withdrawal to a self-directed IRA. The advantage of this option is it allows the account owner to get professional advice beyond what is offered through the company sponsored plan. To find out what options are available in your plan, talk with plan sponsor and an independent financial professional.
For more information about The Retirement Guys, tune in every Saturday at 1 p.m. on 1370 WSPD or visit www.retirementguysnetwork.com. Securities and Investment Advisory Services are offered through NEXT Financial Group Inc., Member FINRA / SIPC. NEXT Financial Group, Inc. does not provide tax or legal advice. The Retirement Guys are not an affiliate of NEXT Financial Group. The office is at 1700 Woodlands Drive, Suite 100, Maumee, OH 43537. 419-842-0550