401K Advice

Advice on 401kAccording to a recent survey by the Employee Benefit Research Institute, only 13% of workers are “very confident” about having enough savings for a comfortable retirement (confidence study, EBRI March 2011). The demise of traditional pensions or other employer-sponsored retirement plans has caused workers to rely solely on their 401K to build a retirement nest egg.

Labor statistics show that the average American will hold 11 jobs between the ages of 18 and 44, and many sadly fritter away their retirement savings in between jobs. According to a Hewitt Associates survey of employees who changed jobs, 46 percent cashed their 401k plan out, while only 25 percent rolled the plan into a personal IRA or new employer 401k and 29 percent simply left their money behind with the old employer.

Don’t leave your 401k behind
I have met with many individuals who show me their stack of multiple “previous job” 401ks; languishing, unmanaged and unattended to. Some have moved several times and the 401k company cannot even locate and continue to send statements, and assets are lost and unremembered. You should roll your previous 401k into an IRA (Individual Retirement Account), and not leave it behind. By rolling it into an IRA in your personal name, you gain access to many more investment options, greater flexibility and benefit planning, no mandatory 20 percent withholding on distributions, and even the choice to convert to a Roth IRA. Investment professionals can help you with the paperwork to open an IRA, transfer your retirement moneys, and counsel you on appropriate investments to suit your investment goals.

Cashing out your 401k may be the worst option
As mentioned above, nearly 50 percent of people who change or lose jobs cash out their 401k balances. While it may be attractive to get cash in hand, this may be a very costly idea in the long run. There are significant penalties involved in this option. You generally will face a 10% penalty if you are under age 59 1/2, and the amount you cash out will also be subject to ordinary income tax. But most importantly, the moneys you intended for your future retirement will lose the potential benefit of tax-deferred compounding for a time when you will need it in the future.

Grab your employer’s 401k match
Join your company’s 401k plan as soon as you become eligible, and sign up for the portion that the company matches. So, if your company matches 50 cents for every dollar you contribute up to 6% of your salary, then sign up for the 6%. I usually recommend not going past this matching amount until you have fully funded a Roth IRA (and one for your spouse, if you are married). But if you have completely funded the Roths, or are disqualified from funding a Roth, then go back and fund more than the match in your 401k. If your company does not offer any match, you will need to evaluate whether it is a good choice to fund the 401k at all. I prefer funding Roth IRAs first for clients, especially younger workers. The Roth will be entirely tax free in the distribution phase (age 59 1/2 or older in a plan older than 5 years), and you are sure to be very pleased in your retirement years to be taking your income out, tax free.

Invest wisely inside your 401k
I see more inappropriate investing mistakes than any other 401k issue. Remember that this is a long term account, and that you should diversify and invest it to outpace inflation. So, for younger employees, the fixed income option or money market is not a wise choice for a large portion (if any) of your 401k. There are, of course, exceptions, but generally you should follow the Dave Ramsey allocation of 25 percent large domestic company; 25 percent small domestic company; 25 percent international company; and 25 percent bond/income choices.
Studies show that close to 20 percent of workers in their 20s and 30s have no stock investments in their 401k accounts at all. Remember that the younger you are, the more time you have to save, invest, and ride out/ buy through market downturns. So, invest for growth and be diversified; don’t change your long term plan because of the news or your co-workers’ alarm.

Don’t borrow from your 401k
Many 401ks allow you to borrow money from your account for up to five years, but you should resist this temptation. It may look good on paper, but time out of the market may cause you to miss out on potential gains. You will have less income to take home, as you will have a required payroll deduction to repay the loan and, if you leave work for any reason, the loan could be due in full. Your 401k is not a glorified savings account, it is the money you are putting away for a time when you possibly will not be able to work, or choose not to.
If you are working for a company that does not offer a 401k, or if you are self employed, you do have options. You can establish and contribute to a self-employed 401k, a Simple IRA, or SEP where you make contributions to your own account as both the employer and employee. Contact a Licensed Investment Professional to help you evaluate the right plan and help you set this up. Remember prudence and wisdom is what you need, “for riches are not forever” (Proverbs 27:24)

Contact Jeff to have your 401k evaluated.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.

Jeffery Masters, President of Jeffery W. Masters & Associates
Securities offered through LPL Financial, member FINRA/SIPC
Investment Advice offered through Independent Financial Partners,
a Registered Investment Advisor. Independent Financial Partners and Jeffery W. Masters
& Associates are not affiliated with LPL Financial.
Jeff is a Locally Endorsed Investment Advisor by Dave Ramsey
Questions? Call 954-977-5150, visit JeffMasters.com or email [email protected]

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