RETIREMENT PLANNING

Understanding 401(k) plans

Secure your financial future with expert guidance

Retirement planning can sometimes feel overwhelming, as there are often so many choices to make about your financial future. The 401(k) plan is used so often today that it has become a common household term. Surprisingly, there’s still many questions about what a 401(k) is, what are the benefits, how much do I need to save, how do I calculate the employer match or the vesting schedule, and how to manage the investments held within. One question that comes up often is what to do with a 401(k) after leaving a job. If you’re investing in a 401(k), it’s important to understand their benefits, and how to manage them effectively.

Withdrawing Funds Without Penalty

You can withdraw funds from your 401(k) without penalty starting at age 59½. If you withdraw before this age, you may face a 10% early withdrawal penalty, along with income taxes. Some employers may have additional policies or benefits to borrowing or withdrawing funds. Also, it’s important to plan your income taxes when considering when to withdraw funds from your retirement accounts. Speak with a financial advisor if you have any questions.

Seeking Help with Your 401(k)

Many financial advisors will offer one or two free consultations before asking for any commitment or charge. If you are looking for help, consider taking advantage of this. A financial planner can offer a broad range of advice, including calculating how much you need to retire, investments, income planning, social security estimates. They can give you an idea of how long your funds will last based on your savings, investments, spending habits, inflation, and more. When interviewing financial advisors, take your time. You want to find someone who is the right fit for you.

What to Do when Leaving Your Job

When you leave a job, you have several options for your 401(k). You can leave it with your former employer, or move it to your new one. However, some will opt to roll it over into an IRA because there can be access to investment choices that are not available in either employer’s 401(k) plan. Or their employer may not have the same distribution allowances. If you choose to do a rollover, be sure to speak with a licensed professional so that you don’t incur any unnecessary tax consequences.

401(k) Benefits

· Automated Savings: For many, this is an emotional and psychological benefit. 401(k) plans are often set up to take funds from your paycheck before you ever see it. These payroll deductions make saving for retirement an automatic process that many would not do otherwise.

· Employer Matching: Many employers match a portion of your contributions, essentially providing “free money” toward your retirement. Some people look at this as a “guaranteed rate of return.” Even though a 401(k) can carry penalties for removing your funds early, a 100% employer match is usually quite a bit more than any penalty. Keep in mind that not all companies offer a match, and it is not always a 100% match.

· Tax Advantages: Most contributions to a 401(k) are made with pre-tax dollars, reducing your current taxable income. Unless made into a Roth 401(k) plan.

· High Contribution Limits – 401(k) plans have a higher contribution limit than other retirement accounts (such as an IRA).

How Much Should You Contribute?

While the amount you should contribute depends on your financial situation, aim to contribute enough to maximize any employer match. Using a 401(k) retirement calculator with an advisor can help you determine the ideal contribution amount. A common recommendation is to save at least 10-15% of your income for retirement.

Managing Investments in Your 401(k)

It is important to speak with a fiduciary regarding any investment risk. What you choose to invest your funds in should be specific to your financial situation, risk tolerance, goals and other variables. However, the following three points apply to most situations.

· Diversification: Spread your investments across various asset classes to mitigate risk. In other words, don’t put all your eggs into one basket. And don’t put them into the different baskets that are all in the same barn.

· Rebalancing: As you age, your family grows, you change careers, or your goals change, you will find that your investment techniques should change along with you. The most common need is to adjust how risky you are as you age. If your portfolio has larger swings 20 years before retirement, that is far less concerning than if swings happen a few years before retirement.

· Monitoring Performance: Keep track of how your investments are performing. But also be mindful to not get too emotional about it. Keep in mind that the lowest price point in an investment will often be the most tempting moment to get out. But it is equally as true that investors will often stay in an investment simply because they can’t bear admitting to a loss.

Investing not only requires a knowledge of the markets, but also a strong understanding of emotional tendencies that can hurt your wallet.

The Importance of Speaking with a Professional

A consultation with an investment advisor can provide clarity and peace of mind. Many advisors offer free consultations. This is a great way to get help with understanding your options, making informed decisions about your retirement savings, and finding investments that match your goals. They can also help you calculate your 401(k) match, appropriately use a 401(k) retirement calculator, and discuss how to optimize your 401(k) investment plan.

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Choosing a financial professional should be done with care. RetirementAndPlanning is not recommending the services of any individual or firm. We do not review performance or quality. We only help to connect individuals with businesses. All due diligence is the responsibility of the individual interviewing different advisors and firms. RetirementAndPlanning receives compensation from 1-5 businesses in exchange for your contact information and permission to call, text, and email you.

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