"He who has money can eat ice-cream in hell." - Lebanese Proverb

SavingAdvice.com Blog

Bridging the gap between saving money and investing


Join Now or Login

401k

How 401K Fees Impact Your Retirement

By Leave a Comment

 

401k feesOne of the biggest killers for investment performance over time is high fees. It used to be that many mutual funds would charge a fee for buying, an annual fee based on the balance invested, and a fee when the fund is sold. For most investors, those days are thankfully long gone. Vanguard started the push for lower fee funds, and nearly every online broker has followed suit.

But the lowering of fees is mostly seen in taxable and IRA accounts. In the world of 401(k) plans, this is not always the case. Many 401(k) plans still have investments with fees that are three to four times higher than what one would see when investing in an IRA.

Not only do many employees pay a high annual fee on the funds they invest in with their 410(k) plan, they also pay an annual administrative fee. Most people have no idea they are paying such an administrative fee, and many have no idea what the annual fees on their funds are inside their 401(k) plan.

Finding Your Fees

The administrative fee on a 401(k) plan can be difficult to find, which means you would need to ask your Human Resources director or person in charge of the plan for that information. But the annual fund fee, known as the expense ratio, is now easier than ever to find thanks to all of the great financial planning software and tools available to the public. I used WealthTrace’s financial planning application to view the fees on several ETFs.

Not only can I see the expense ratio for each fund, but I can also view the total dollars I pay each year in fees along with the fund turnover. For taxable investment accounts, the turnover can really make a big difference in taxes. The higher the turnover, the more in capital gains one usually pays.

How High 401k Fees Can Crush a Portfolio

Most of us know that investment gains compound over time as more money is reinvested. But fees work the opposite way. They are a negative and therefore compound negatively over time. I looked at a portfolio that has a balance of $700,000. I ran a fee what-if scenario where the annual fees on all investments were increased by 0.5%.

The portfolio value was reduced by over $655,000 over 30 years. This value does not even take into account inflation over that time frame either. The result is in today’s dollar terms. This just shows how even a small increase in fees can have a huge impact on retirement investments. A hit like this can mean that even $1 million might not be enough to retire on.

What You Can Do

If you have an IRA or taxable investments, make sure you are not paying too much in annual fees. Look for the expense ratio for your funds. For most funds that are not actively managed, you should not be paying more than 0.15% per year. Vanguard is usually the best in terms of fund fees so I always recommend starting there.

For 401(k) plans you should look for your expense ratios. Make sure your company offers index funds with fees that are at least below 0.4%. They should also offer a target date retirement fund that reallocated your investments towards a more conservative approach as you get older. These types of funds are great for those who do not want to worry about reallocating their investments over time. The fund does it for you!

You should also ask the person in charge of your 401(k) plan what the administrative fees are. If they are more than 0.5% per year, you should ask if they can change 401(k) providers. The 401(k) provider industry is becoming more competitive, and more and more companies are moving to Vanguard, which as mentioned earlier, is always a great place to start when trying to lower fees.

Lastly, it is a good idea to roll over a 401(k) to an IRA if you leave a company or retire. This way you will have access to thousands of funds with lower fees. You also will get rid of any administrative fee you are currently paying.

Read More:

What You Need to Know About Trump’s Proposed Changes to Required Minimum Distributions

By 8 Comments

Required Minimum Distributions

Early retirement planning is the smart way to make your retired life better. Retirement savings are extremely important. Millions of Americans use IRAs and 401(k)s to save up for their golden years. These tax-deferred accounts provide a tax break now.  The agreement is that they’ll pay taxes on it in retirement. Once you begin to withdraw from your IRA or 401(k), there is a required minimum distribution.  You must adhere to the distribution to avoid paying a hefty penalty.

For years, people have looked at these laws as unfair. After all, many people save their entire lives to be able to retire comfortably just to be hit with fines. However, President Trump has signed an executive order that will lead to a change in these rules. The new change is mainly loosening the requirements for minimum distributions.

About Required Minimum Distributions

Required minimum distributions (RMD) are put into place to limit the tax benefits retirement savers are able to receive. RMD rules state you must begin taking withdrawals from retirement account the year you turn 70 1/2. Account holders must calculate the amount they have to take out each year, regardless of whether they need it or not. For many people, this has increased the likelihood of running out of money during retirement.

President Trump Calls for Changes

Last week the president signed an executive order calling for the Department of Labor and Department of Treasury to consider two things. First, he wants to raise the age when people are required to start taking the RMD. Second, Trump would like to find a way to make it easier for small businesses to offer retirement plans for employees.

He has given the Department of Treasury six months to consider pushing back the age because many Americans are outliving their retirement. The current average life expectancy in the U.S. is 78 1/2. Additionally, he has given the Labor Department six months to consider easing regulations that would allow small businesses to offer retirement plans. This would give the opportunity to save for retirement to more than 42 million employees in the U.S.

Financial advisors helping retirees are hopeful that the order will lead to more relaxed RMD rules or, even better, the removal of the rules altogether. However, even if the executive order pans out, it could take years for the rules to change. It also isn’t clear whether a simple rule change can be done without congressional approval.

Either way, if you have an IRA or 401(k) that you don’t need to tap into right away, these changes could make a huge difference in your financial plan for retirement. For many, it would mean having more security than ever.

Readers, what do you think about President Trump’s proposal?

Read More

5 Challenges Women Face in Retirement

By Leave a Comment

Challenges women face in retirement can be grouped in five categories.
How’s your retirement plan holding up? If you are a woman, you’re probably having more difficulty with retirement plans than your male counterparts.

Despite advances, women still face lower average salaries – 82 percent of the average man’s salary, according to the Pew Research Center.

Fewer working years on average, often due to time off for child care or family responsibilities, adds to the difficulty of earning sufficient income for retirement savings.

Here are five areas that seem to be most challenging for women approaching retirement, according to the recent edition of the Transamerica Retirement Survey of American Workers.

1. Lack of Confidence

Only 12 percent of women reported being “very confident” that a comfortable retirement is in their future.

Perhaps that’s because more than four out of five women don’t expect Social Security benefits to be available for them when they decide to retire.

2. Working Beyond Retirement

Over half of the women surveyed by Transamerica expect to be working beyond age 65.

While 53 percent of women say they intend to retire beyond age 65 or never retire at all, 54 percent expect to work after retirement.

Most of those women (43 percent) plan to work part time, while the remaining 11 percent plan to work full time.

The reason for working into retirement or never retiring at all may be financial, since 64 percent of women surveyed have no alternative plan for income if they have to retire sooner than expected.

Are women taking the proper steps to make a longer career feasible? Job-related factors are not promising.

Only 46 percent of women stay current with their job skills, and only 57 percent are focused on doing a good job in their current role – effectively reducing their value as retirement nears.

3. Savings Concerns

More women place a priority on paying down debt (68 percent) than on retirement savings (51 percent) – but at least they are saving.

Seventy-three percent of women contribute to a retirement program, and started saving for retirement at a median age of 27.

The median retirement account balance is estimated at $42,000 – not as grim as it sounds since this is averaged across age groups.

While 30 percent of women expect to depend on Social Security, 45% will be drawing from traditional retirement programs (401(k), IRA, etc.) or other separate savings accounts.

The good news – almost two-thirds of working women are offered employee-funded retirement plans, and 77 percent of those women participate in the programs.

The median contribution is 7 percent of their salary. The bad news – 28 percent of women work in part-time positions where employee-funded retirement plans are less likely to be offered.

Women’s emergency savings accounts contain a median of $2,000 – which doesn’t cover much of an emergency these days.

4. Health

While 63% of women report keeping healthy, only 26 percent of women consider their long-term health when making lifestyle choices.

Are women expecting their good health to continue into their retirement years?

5. Financial Knowledge and Education

Women expect to need $500,000 in retirement – but 55 percent admit that’s a guess.

Less than half (47 percent) of female baby boomers know “a great deal” or “quite a bit” about Social Security benefits – a low percentage given that boomer women are at or near retirement now.

Only 28 percent of women know about the Saver’s Tax Credit, a useful tool for lower-income women.

Professionals can fill the education gap – but only one-third of women use professional financial assistance in their retirement plans.

America’s women must be proactive with retirement plans. You’ve spent a lot of time taking care of others. Now it’s time to take care of yourself.

This article was provided by our partners at moneytips.com. Photo ©iStockphoto.com/PeopleImages

If you enjoy reading our blog posts and would like to try your hand at blogging, we have good news for you; you can do exactly that on Saving Advice. Just click here to get started.

Read More

Retirees Would Return to Work Under the Right Conditions

By Leave a Comment

More Than Half Of Retirees Would Return to Work Under the Right Conditions

Are you planning to work in retirement? If so, is it because you need money? The recent American Working Conditions Survey (AWCS) from the Rand Corporation think tank suggests another reason – you want to be there.

A Rand brief on the AWCS survey compared working conditions and expectations of older workers (age 50 and up) to those of workers in their prime working years (ages 35 to 49).

Over half of those aged fifty and above who weren’t working or looking for work said they would return to work under the right conditions – but what are those conditions? Do they match up well with today’s workplace?

Trade-Off for Retirees

Generally, it’s a trade-off of benefits and salary for control – having some control over how they do their work, the pace of the work, flexibility in hours, and keeping the physical demands of the job at a reasonable level.

Workers approaching retirement have already achieved some of these conditions, according to the survey.

Over two-thirds of older workers tend to find their work more meaningful and useful to the company, and they are more likely to use their own ideas and apply problem-solving skills on the job.

More Interesting Work

Older workers are also less likely to have monotonous tasks – presumably, they have either advanced to more interesting work or found a different job.

While few jobs offer flexibility to balance work and family life, the survey shows that older workers are more likely to have such jobs – especially college graduates.

However, flexibility in retirement is less likely to meet the needs of the company without a compromise.

Physical Exertion

Older workers are still almost as likely to have exposure to “intense or repetitive physical exertion” as younger workers.

By accommodating older workers’ limitations, companies can retain knowledge and experience while maintaining workplace efficiency.

According to the Transamerica Center for Retirement Studies, almost three quarters of companies think that most of their workers expect to work past age 65 or do not plan to retire – yet only 39 percent offer flexible schedules to pre-retirees as a transition phase.

Willing to Compromise

Companies may be assuming that retirees won’t compromise in retirement. Transamerica found otherwise.

Approximately 78 percent of workers expect their job title to change if they take on a new role with fewer responsibilities, and 71 percent expect to be paid market rates for their new responsibilities even if that results in lower pay.

The main sticking point may be benefits. About 60 percent of workers shifting to part-time work expect to retain employee benefits – unusual among part-time workers.

Age Discrimination

Employers have another hurdle to consider. The Government Accounting Office (GAO) found that tax and age discrimination laws provide serious challenges to transitional retirement programs – although the GAO finds that companies who do establish these programs find them beneficial.

Decisions on transitional retirement should be based on your preferences and options, not a lack of retirement funds.

Retirement plans should involve both financial and personal aspects of your career.

Start by saving for retirement as early as possible. Take advantage of employer-based programs and fund them regularly. Set up an IRA or other savings vehicle if no 401(k) program is available.

Look for a Good Fit

Meanwhile, look for a good fit for your working retirement that meets your company’s needs. Be prepared to make reasonable compromises.

If there’s no good fit, consider what other companies might use your skills, or whether you’re better suited for consulting (with greater control but more personal responsibilities).

In any case, you’re better off with a plan. You’re more likely to find the best position in retirement if you expand your options – and possibly create your own.

Prioritize Your 401(k)

Regardless of where you plan to retire, the number one factor in ensuring that you can retire on your terms is your 401(k).

Make sure that your 401(k) is maximizing its potential with this free analysis that checks your fees, fund mix, and other factors to help you hit your retirement goals.

This article was provided by our partners at moneytips.com. Photo ©iStockphoto.com/izusek

If you enjoy reading our blog posts and would like to try your hand at blogging, we have good news for you; you can do exactly that on Saving Advice. Just click here to get started.

Read More About Retirement

If you liked this article, you might enjoy the wealth of stories in our archives surrounding retirement planning.

1 In 5 Americans with Matching 401(k) Plans Are Leaving Money on the Table

By Leave a Comment

Matching 401(k) plans are one of the coolest types of employee benefits out there.
Who would turn down free money? Apparently, plenty of Americans are doing exactly that: 20 percent of them underfund matching 401(k) plans, according to the Motley Fool. This significant mistake effectively dismisses free money.

Approximately three-quarters of companies with 401(k) plans offer a matching program where the employer contributes an equal amount to the employee’s contribution up to a certain limit.

The employer’s matching contribution is extra money that you receive simply by contributing to your retirement account – in essence, free money.

Bypassing Free Money

If you don’t contribute to the matching limit, you are bypassing the opportunity to add this free money to your tax-deferred retirement funds.

Matching programs may offer dollar-to-dollar matches or percentage matches. According to 2015 data from the Deloitte Annual Defined Contribution Benchmarking Survey, the most common matching amount is a 50% match up to 6% of employee contributions (used by 18% of plan sponsors), followed by a 100% match up to 6% (used by 12%).

Under these programs, if you made $40,000 and contributed 6% of your salary ($2,400) to your retirement plan, your employer would contribute an extra $2,400 under a 100% match and $1,200 under a 50% match.

Unclaimed Money

Now, assume that you only contribute 3% of your $40,000 salary into your 401(k) plan. Your employer would then contribute $1,200 under a 100% match and $600 under a 50% match – and you would leave an equivalent amount on the table, unclaimed.

Failing to take full advantage of an employer-matching program applies a double hit to your retirement funds. Not only are you turning down money that you could have claimed, you are also losing out on the compounding of those funds over time.

The Motley Fool provides an example of an employee making $100,000 per year at an employer offering a 50% match in contributions up to a 5% limit. If you contribute up to the 5% limit, you will be adding $5,000 annually and your employer will kick in another $2,500. Assuming a 7% annual return on your investments, your nest egg will reach $708,000 in thirty years.

Another Scenario

Contrast that with a 3% contribution. You will be contributing $3,000 each year and your employer will be contributing $1,500. You’ve refused an extra $1,000 annually and contributed less to your own retirement.

Using the same growth assumptions as above, your nest egg will be approximately $425,000 in thirty years. That’s a potential drop of $283,000. How would your plans for retirement change with a $283,000 drop in funds?

Does your employer do automatic enrollment on a 401(k) program? Check the program rules. The default contribution level for automatic enrollment is usually different from the matching contribution limit. (Typical automatic enrollment levels are 3% of salary.)

You must request that your employer raise your contribution to the required matching limit – and if you can afford it, there’s nothing wrong with maxing out your 401(k) to the total dollar contribution limit ($18,500 for 2018 with an additional $6,000 catch-up contribution if you are over age fifty).

Okay in the Short Term

In some cases, it may be reasonable for a short time not to contribute to the matching limit of a 401(k) program. If you are paying down excessive debt, especially high-interest debt such as credit cards, the benefits may be worth missing out on an employer match – for a while. Those exceptions are few.

Take full advantage of any 401(k) matching program, at least up to the matching limit. Adjust your budget if necessary to devote the sufficient amount of your pay to the 401(k). When retirement arrives, you’ll be very glad that you did.

Regardless of where you plan to retire, the number one factor in ensuring that you can retire on your terms is your 401(k). Make sure that your 401(k) is maximizing its potential with this free analysis that checks your fees, fund mix, and other factors to help you hit your retirement goals.

This article was provided by our partners at moneytips.com. Photo ©iStockphoto.com/AnthonyRosenberg

If you enjoy reading our blog posts and would like to try your hand at blogging, we have good news for you; you can do exactly that on Saving Advice. Just click here to get started.

Read More

Can You Put Cryptocurrency in Your IRA? Study Shows Interest.

By Leave a Comment

Cryptocurrency And Retirement New Study Shows Interest in These Volatile New Investments

How’s your 401(k) or IRA doing? A typical 401(k) plan returns from 5% to 8% based on a portfolio of 60% stocks and 40% bonds and other conservative investments. If your retirement plan is not meeting expectations, you may be tempted by the high returns of cryptocurrencies like Bitcoin – but should you be wary of incorporating cryptocurrency into your account?

A recent survey by the retirement planning platform Auctus suggests that people are increasingly intrigued by cryptocurrencies.

While only 6% of respondents were willing to consider using cryptocurrencies in their retirement plans, another 14% were interested in the concept but not certain that Bitcoin or similar vehicles were right for them.

Roller Coaster Ride

Given the exceptional roller coaster ride of Bitcoin, who could blame investors for being interested? Consider that Bitcoin closed January 2017 at just below $1,000. By mid-December 2017, Bitcoin peaked over $19,300. By February 5, 2018, the price dropped below $7,000.

Few investments grow by a factor of 19 in less than a year. Not many investments lose over 60% of their value in two months’ time, either.

Retirement accounts are designed to balance returns and risk, with the balance shifting toward lower risk investments as you near retirement. Bitcoin and other cryptocurrencies are on the far end of the spectrum – high risk, high reward. Can you tolerate the potential risk?

Put Them in an IRA

Let’s assume you want to forge ahead with a cryptocurrency investment. Retirement account fund rules don’t allow you to purchase cryptocurrencies directly and transfer them to an IRA or 401(k) account.

You will either have to create a self-directed IRA that allows you to set up your own investment, or invest in the Bitcoin Investment Trust that owns Bitcoins on the behalf of its investors.

Both approaches come with hefty fees compared to other investments. In addition, most of the self-directed IRA custodians will require that you have another company make the cryptocurrency purchases for you or create a legal entity such as an LLC that allows you to invest directly. Consider these issues as you make your investment decision.

Existing Exchanges

You always have the option to buy and sell Bitcoin through the existing exchanges and keep it in a taxable account separate from your retirement accounts.

Since virtual currencies are considered to be property, they are taxed at the lower capital gains tax rate – so there can be tax advantages to this approach.

Cryptocurrencies in retirement funds may make sense in a few cases. If you are young and can afford to recover from any significant losses, why not try to take advantage of a sharp rise in Bitcoin or similar investment? Keep your purchases below 10% of your portfolio – less if you can’t deal with the potential risk.

Risk Factors

Meanwhile, if you are nearing retirement and can’t possibly catch up with a conventional portfolio, you can try for a “Hail Mary” with a Bitcoin investment – but understand that you will be in even worse shape if your purchase is mistimed. What are your retirement options if the investment fails?

Keep risk in perspective and fit any Bitcoin purchases into the small number of high-risk components of your portfolio.

If you are investing in one of the Bitcoin alternatives such as Ethereum, Litecoin, or Ripple, make sure you investigate the program just as you would any stock investment. Understand the risks and growth assumptions.

For most of us, cryptocurrencies are like a trip to a casino. Don’t invest any more in cryptocurrencies than you can afford to lose – and few of us can afford to lose retirement account funds.

Regardless of where you plan to retire, the number one factor in ensuring that you can retire on your terms is your 401(k).

This article was provided by our partners at moneytips.com. Photo ©iStockphoto.com/5432action

If reading this blog post makes you want to try your hand at blogging, we have good news for you; you can do exactly that on Saving Advice. Just click here to get started.

Read More