Don’t Be Stupid with Your 401(k)

 

Your retirement fund is arguable one of the most important investments you will make in your life. Whether it is your 401(k) or IRA fund, starting your investment as early as possible is a must. Making contribution commitments to your retirement investment can translate to hundreds of thousands of extra money at your disposal during your thirty plus years as a retiree.

On Wednesday, April 5, 2017, the Department of Labor postponed part of the April 10 scheduled implementation of the fiduciary rule to rather go into effect on June 9 as a result of President Donald Trump’s request to edit or roll back the Obama Administration’s rule that was implemented to protect those saving for retirement from poor advice from self-serving brokers.

Evaluate All Investment Options Before Committing

A good place to start is with your current 401(k) and IRA funds, and evaluating the pros and cons of each. For one, many 401(k) plans offer stable-value funds that essentially deliver interest rates, around 2%, much higher than many other similar cash offers. On the other hand, switching to an IRA account could save you money when it comes to fees. This particularly applies if you work at a small company, where expenses are structured into 401(k) accounts, and can be around 1% each year. If you have an account balance of $1,000,000, switching from a 1% to 0.5% fee account, that would easily save $5,000 per year that you can take advantage of post retirement. Another major difference that retirement savers need to consider are the options a 401(k) and IRA can offer. According to Brightscope report, the average 401(k) offers around 28 investment offerings, whereas an IRA can have over 10,000 options from various companies.  

Know Your Exit Route Options

Another key component of your retirement fund is how you can take advantage of your saved capital. IRA funds offer far more flexibility considering you are able to withdraw funds on your own terms. While a 401(k) account has more restrictions, especially if you want to withdraw prior to your retirement age. Although, with some 401(k) accounts, there is an increasing flexibility, with almost 61% of large 401(k) accounts now permitting a varied or fixed monthly withdrawal. It is important to look into your own investment funds, and see how their flexibility fits into your unique retirement plan.

Draft Your Own Fiduciary Rule

The fiduciary rule is defined by the standard that brokers must put their client’s financial interests and well-being above that of their own. Despite the outcome of the rule’s enactment, creating financial standards of your own in regards to dealing with your retirement investments is a smart way to stay on track. One of the easiest modes is to seek out only fiduciary qualified advisors. You can find a list of these qualified financial planners on napfa.org and garrettplanningnetwork.com.

Finding a fiduciary planner on one of these online resources is the first step, but you also need to use your own personal judgement and standards to determine whether your planner has your best interest at heart and falls in line with your retirement plan. A quality financial planner should truly educate their clients not only about potential annual returns, but equally about the involved risks.

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Are You Ready to Retire Early?

 

There seems to be a million and one reasons why one would want to retire early. Job dissatisfaction, the urge to travel, more time to spend with family, and the list goes on. Though, retiring at a younger age can be a daunting and difficult feat that comes with its’ own stresses and hardships.

Before setting out in the mission to retire early, there are some questions you should review in the process. Even if early retirement is not in the cards for you, these mind provoking questions can help you make a plan and become more financially prepared for the future.

  1. How do you plan to support yourself and your family post retirement?

Before you reach an eligible retirement age that allows you to tap into your 401(k) or other retirement fund, you should have a plan as to how you will support your lifestyle and family. This could be from a number of things including stock dividend earnings, renting out an owned property, working a part time job, or even selling shares from an index fund. As time goes on this plan may change, so having more than one source of income will allow you to stay flexible and grow with your plan as life changes.

In addition to setting a plan for your income source, it is always a great idea to set out a budget. Budgeting is a great mechanism you can use to plan for all of your potential expenses, costs of living and spending money that you will need for adventures and things to do once you retire. Another helpful tool in budgeting is projecting expenses. Will you have to pay for your children’s college? Is there a certain trip you want to take during retirement? Will you have enough income to support you even if the market conditions fluctuate? Taking all of these variables into consideration will help you to determine if you are able to support yourself and family in retirement.

  1. Do you have a rainy day fund for emergencies?

You cannot plan for everything in life, and that includes emergency expenses due to illness, natural disaster, bad stock market conditions, and even recessions. Looking at the potential for any type of emergency and how you can protect yourself is very important. Reviewing the potential for umbrella insurance, an emergency savings account aside from your investments, homeowners or renters insurance and life insurance are all things you should take a look at in order to safeguard yourself and finances.

  1. How will you cover your health insurance?

Not only is having an emergency plan in place important, but proper health insurance that will cover you in need of any needed medical attention. Health care related expenses are one of the leading reasons people go bankrupt. So make sure that a health care plan that benefits you and your family fits into your budget.

  1. What does your post-retirement life to look like?

Transitioning from a full-time professional life to retirement can be an entirely different lifestyle. Setting up a plan and idea of what you want your days to look like now that you are not fully scheduled with meetings, commuting or other work related events. Find new hobbies, groups, ways to volunteer, and things you can be involved with on a regular basis. You want to be sure you are not only having fun, but are fulfilling your self-worth and passions without your career.

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Pros and Cons with Paying for College with your Retirement

Paying for College

With the cost of a college education continuing to increase, there are a number of questions on how to financially plan and pay for the educational investment. Of course there are “529” college saving accounts that are a great option to grow your money tax-free in a mutual fund, but what are your other options.

Many question whether they should withdraw from their 401(k) account in order to pay for their children’s college education. The answer you will get from most financial advisors is a definite no. The reasoning professionals in the finance sector will give is that you have the option to borrow money for a student loan, but you do not for your retirement.

If a large enough sum is withdrawn from your 401(k) account or IRA fund, it can leave you in a vulnerable financial position with less time to regrow your balance, and as a result limiting your options for retirement.

In addition, the interest rate of student loans is typically less that the long term annual returns of your retirement investment funds. So it makes much more sense to borrow for your child’s college education and withstand from draining your mutual fund. Even if that means potentially helping them pay back that loan following their graduation date.

David Royal, president of Thrivent Mutual Funds in Minneapolis explains, “Helping your children with their college costs is a nice gesture if you can afford it, but you should likely not do it if it leaves your underfunded for your retirement years.”

Realistically, taking money out from your retirement fund could leave you missing out on the stock market’s compounding potential to grow your retirement saving balance. Consequently, paying for four years of university from your 401(k) or IRA fund can set a retirement saver back anywhere from six to ten years of account value, depending on the market’s circumstances.

As for investments that are a smarter financial decision to help pay for your child’s college education, a 529 fund is always a great option, but you should be aware of their specific benefits and limitations.

For one, target-date funds, like 529 accounts, can be a great option for those looking to make an investment that will help cover the costs of a college education. This mutual fund portfolio allows for you to invest your money in a collection of stocks and bonds, and steadily get closer to a fixed income as your child approaches their time to enroll in college. The downside to this would be the inability to manage your mutual fund hands on, especially for those looking to have more control over their investments.

For example, 529 funds are limited in that they can only be used to cover the cost of your child’s tuition, room and board, school fees and supplies, computers and books. Anything other than qualifying payments will be subject to income tax. These non-qualifying student costs could include anything from transportation, your own personal expenses or retirement, and medical expenses.

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