Mistakes to Avoid in Your 401k – Ep 09

Last week, we offered some tips to help you better manage your 401k. You can watch it here. This week we will share some common mistakes we see people make in their 401k plan. And, we will provide some suggestions on how to avoid them.

Video: Mistakes to Avoid in Your 401k

Did You Miss part 1?

Last week we offered some tips on how to better manage your 401(k).  You can view the entire post by clicking on the button.  If you just want to watch the video….

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401k Mistake 1:  Performance Chasing

You have a list of funds. Your employer provides you a list. Included with the list are trailing performance stats. We pay attention to the funds with the best results. Who doesn’t want to own the best performers?

Here’s the problem. The best performers in the past won’t always be the best performers in the future. Studies by both Vanguard and Standard and Poors show funds who outperfomed in the past often underperform in the future.

To avoid this, consider funds which track a specific index. They won’t always be the big winners. But you also don’t have to rely on whether a manager can repeat his past successes, either. Funds which track a specific index also tend to have lower costs.

401k Mistake 2: Trying to Time The Market

Major declines in your account values cause stress. This is the most difficult part of being an investor. People want to try and avoid those downturns. So, they try to guess when to move in and out of stocks. Unfortunately, most people struggle to be successful at timing those major moves. A study by JP Morgan showed the impact of missing the good days on investor returns.
401k

401k Mistake 3:  Misusing Target Date Funds

A few years ago, fund companies created target date funds. They were designed to simplify the allocation decision. You choose the fund with the target date closest to the date you wish to retire.

As you get closer to retirement, the fund automatically adjusts the allocation. It will reduce the amount it allocates to stocks, and increase the amounts invested in bonds.

Need some help?

We would be happy to help you look at your plan and discuss it with you.  Click on the button to get started.

Tips to Help You Manage Your 401k – Ep 08

Does managing your own 401(k), 403(b) or Deferred Comp plan intimidate you? The decisions you make have a huge impact on your long term results. Today is the first part of a two part series. We’ll offer some basic tips for your 401k.

Video: Tips for Your 401k

Watch Part 2

 

      Mistakes To Avoid in Your 401k

 
Or see the entire blog post by clicking the button.

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Tip 1: Asset Allocation

Asset Allocation describes how you mix the major asset classes in your account. How much you invest in stocks, bonds, cash and other assets will determine your returns. And it will determine how much your account fluctuates in value.

When investing, you make a trade off. Assets like stocks offer a lot of potential for return. But it comes with some wild swings in vlaue.

Investments in bonds or cash limit the volatility. But they don’t provide many opportunities for growth.

Tips for your 401k
Tips for your 401k
Tips for your 401k
Tips for your 401k

Tip 2:  Keep it Simple

Many plans offer a lot of different choices. It is tempting to own many different funds. But, owning 15 different stock funds doesn’t mean you are diversified. Identify a small handful of funds to build your account. Try to use between four and eight different funds for your allocation.

Tip 3:  Pay Attention to Costs

Every fund in your retirement plan has an expense ratio. This is how the fund company makes money. Some funds cost more than others. Expense ratios are often stated as basis points. A basis point equals 1/100th of one percent. Expenses eat into returns. Funds with higher costs have to earn more than the lower cost options to create equal returns for you. When possible try to use the lower cost options.

Tip 4: Don’t allocate too much to company stock.

Many plans allow you to buy the stock of your employer. Owning too much of your employer’s stock can increase your risk. A good guideline is to own no more than 10% of the stock in your account. Your employer may be doing well today, but things can change. History shows a lot of examples of companies who were doing well and then were suddenly worth nothing.

Want a second opinion?

We would be happy to help you look at your plan.  We will offer some tips for your 401k plan.  Simply click the button to contact us.

Replacing Income in Retirement — Ep 07

Replacing income in retirement creates a puzzle. Most of us will depend on two sources: Social Security and our savings. How much income you need from your savings depends on your Social Security. And, how much of your income Social Security replaces depends on how much you earn.

We’ll discuss how this fits together on today’s episode of Monday Morning Money.

Video: Replacing Income in Retirement

Progressive Benefits

The more you earn the more your Social Security benefit will be—to a point. There is a maximum benefit. But it is a progressive benefit. Social Security replaces a larger percentage of income for lower earners.
Replacing Income in Retirement
Replacing Income in Retirement
Replacing Income in Retirement
Replacing Income

Plan for A Better Retirement

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Some estimate you need to replace between 70 and 80% of your household income in retirement. And for most of us that will come from two sources. Social Security and what we save.

So how does Social Security impact how much you need to save for retirement? Stick around we’ll talk about that next.

So how do we know we’ll only need seventy to eighty percent of our income in retirement?

While this is somewhat generalized, there is some merit to it. Some of the outlays you have while you’re working will not be there. For one, you’ll no longer be adding money to your 401(k) or other accounts. And many people will have a smaller income tax liability. You may also see some other work related expenses decrease.

We need to know how much is going to come from what source.

Replacing Income From Social Security

For the overwhelming majority of us, part of that income is going to come from Social Security. The Center for Policy basics estimates 97% of the people over 60 will receive Social Security. But how much can we depend on?

Social Security has a complicated formula. The more you make during your working years the higher your benefit will be, to a point. It does max out.

But Social Security retirement is a progressive benefit. If you make $50,000 per year, Social Security will replace a larger percentage of your income. If you make $150,000 per year, it will replace a smaller percentage.

Let’s show you what we mean, and keep in mind these are general examples

A couple who earns $50,000 per year has 53% of their income replaced by Social Security.

A couple who makes $100,000 will discover Social Security replaces 38% of their income.

And a couple with an income of $150,000 will have 27% of their income replaced by Social security.

As income levels increase, Social Security benefits replace a smaller percentage of income.

Replacing Income From Savings

The more you earn, the more important it is to save for retirement. Because your savings will have to do a lot more heavy lifting.

Let’s show you what we mean.

So if our income replacement target is 75%,

that couple who makes $50,000 , will need 22% of their retirement income to come from savings. If we use the 4% rule, That equates to about $275,000 in savings.

The couple who makes 100,000, will need 37% of their income from their nest egg. This means they need a nest egg of about $925,000.

And the couple who makes 150,000 will need their savings to replace half of of their income. This requires retirement savings of roughly 1.8 Million dollars.

This is a general example with certain assumptions about Social Security benefits. Real life will look different for most of us, but the general concept still applies.

The best thing you can do is get a copy of your Social Security Earnings record and benefit statement. This can improve how you plan for your future.

Get A Copy of Your Social Security Benefit Statement.

To plan for your retirement, you need to have a good idea of what your Social Security benefits will be.  You can get a copy of your Earnings Record and Benefit Statement, by visiting the Social Security Administrations website.

Watch Other Episodes of Monday Morning Money

Catch up on the previous episodes of our weekly video series, Monday Morning Money.  You can also see them on our facebook page and our YouTube channel.

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529 Plans and Financial Aid – Ep 06

A new grandchild often inspires us to do something to help with future education costs.  And Most  people automatically think about a 529 plan.  That’s understandable. There aren’t many types of accounts which allow for TAX FREE growth.

But before you open that new account, you should be aware of a couple of “traps.”  We’ll talk about it on today’s episode of Monday Morning Money.

Video: 529 Plans And Financial Aid

Plan for A Better Retirement

We created Monday Morning Money with one goal in mind.  Give you information to inspire you to plan for a better retirement. 

We publish a new episode each week.  And, we will deliver it right to your inbox.

Don’t miss an episode, subscribe today!

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529 plans were created in 1996. They allow for Tax Free growth when used for qualified education expenses. On the surface, they seem like the perfect tool to help save for the future costs of college.

But there are a few traps. Most of those issues center around how this account impacts financial aid.

The Hidden Financial Aid Trap for a 529 Plan

A 529 plan owned by a parent impacts the financial aid formula. But, an account owned by a grandparent doesn’t count in the expected family contribution. At first thought, you might think grandparents should own the account.

And here is where you find the hidden problem.

A distribution from a 529 plan owned by a grandparent counts as income to the student on the financial aid form. And, the distribution can reduce the financial aid package by 50% of the distribution.

This means, if your grandchild was to get $10,000 of aid, a $10,000 distribution could reduce their aid by $5,000.

Having the parent own the account might be a better option.

Parent owned assets do count towards the expected family contribution. But, their impact may not be as great as the distributions from the grandparent owned account.

Only 5.64% of the value of a parent owned account counts against a financial aid award. In number terms, a $10,000 account will only reduce the aid award by $564. On top of that, distributions from a parent owned 529 plan won’t count as income either.

If you, as the grandparent, own the 529 account, you need to plan the timing of the distributions. This means, the distributions should happen in the final two years of college.

Other Financial Aid Traps

This also brings up a couple of other things which could impact a financial aid award.

Sizable Gifts from a grandparent also get treated as income to the student on the FAFSA form.

Parents who tap into a Roth IRA to help their kids pay for college can also cause a problem with financial aid. Those tax free distributions count as income on the FAFSA.

Those items could reduce the amount of the financial aid award by 50% of the distribution or gift.

Helping your grandchildren save for college is a tremendous gift. The future costs will be staggering for certain. But it is worth looking at the big picture before you open an account.

 

Ohio’s 529 Plan

Click the button to visit the website for Ohio’s 529 Plan

West Virginia’s 529 Plan

Click the button to visit the website for West Virginia’s 529 Plan

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Catch up on the previous episodes of our weekly video series, Monday Morning Money.  You can also see them on our facebook page and our YouTube channel.

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Health Savings Accounts – Ep. 05

Health Savings Accounts are reshaping the way we think about saving for retirement. They are said to be triple tax advantaged. And when you consider the average couple will spend $280,000 on health care in retirement, the HSA should be in our plans.

Video: Health Savings Accounts

Where does the $280,000 go?

You may think the $280,000 figure would include things like Medicare supplements or even the costs for a nursing home stay.  Not according to Fidelity.  This figure covers the bare minimum as shown in the graph below.
Health Savings Accounts

Plan for A Better Retirement

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We publish a new episode each week.  And, we will deliver it right to your inbox.

Don’t miss an episode, subscribe today!

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Do you have a health savings account? If so, this could be one of the best tools to help you save for retirement. They are triple tax advantaged. The government created Health Savings Accounts in 2003. They allow people covered by a high deductible health plan, to set money aside to pay for their regular health expenses. They are one of the more advantageous tools to use for retirement savings.

Health Care Costs in Retirement

The average couple will spend over $280,000 on health care in retirement. Those costs include:
  • medicare part b and part d premiums
  • Costs for prescriptions and,
  • the outlays you have for deductibles and co-pays.
This can be one of the largest expenses of retirement. Paying these expenses out of your 401(k) or IRA, create taxable income. If you pay those costs out of an individual or joint account, you may incur capital gains. But if you use a Health Savings Account….

The Triple Tax Benefits of Health Savings Accounts

Consider this.
  • A health savings account allows you to accumulate money on a tax deferred basis,
  • It’s funded by tax deductible contributions,
  • And distributions to pay for those qualified health care expenses are not taxed.
The list of qualified health expenses includes:
  • co-pays and deductibles.
  • Prescriptions,
  • and even your medicare premiums
  • long term care insurance.
  • eye doctor and eye glasses, and
  • dental expeneses.
And if you wanting to retire before you reach age 65, you can also use your HSA to pay for your insurance premiums. And if you do, all those distributions are TAX FREE. To be eligible to use a Health Savings Account, you have to be covered by a high deductible insurance plan. If you aren’t sure if your health plan is a high deductible plan, check with your employer or your agent. You can contribute up to $7,000 if your plan covers more than one person and $3,500 if it only covers you. You get a tax deduction for the contributions you make, even if you don’t itemize. If your employer makes the contributions, the amount is not included in your income. So how can you best use this type of plan?

Prioritize Your HSA

Shift your saving strategy. For years, people would try to maximize their retirement plans or IRA contributions. Consider shifting some of those savings to your HSA. You want to maximize the employer matching contributions in your 401(k). But it may be worth it to shift some of your savings to maximize your HSA contributions.

Conserve Your Health Savings Account

Pay for your current small medical expenses from other accounts. You can use the health savings account for those qualified medical expenses. But don’t use it to pay for that $5 generic drug, the $25 office co-pay, or even the $150 dental visit. By spending less from that account, it will help your balance grow faster.

Pursue Long Term Growth

Invest it. I have an HSA account. My provider allows the participants to open an investment account to pursue long term growth. Be careful though. Your provider may have service fees if your primary HSA checking account falls below a certain level. Make sure you know their rules. The triple tax benefits of :
  • deductible contributions,
  • tax deferred growth,
  • and tax free distributions for qualified medical expenses
are game changers. And, they are reshaping how we think about saving for retirement.