The 401(k) retirement savings plan is one of the best ways to save for retirement. The result of a provision in the Revenue Act of 1978, the 401(k) has become so popular that it is now the main source of retirement savings for many Americans. At first the provision allowed employees to save in a tax-deferred account to supplement his or her pension and Social Security benefits. As employers defined benefit plans have become less and less common the 401k plan has taken on greater significance for the average American.
A thorough review should be conducted at minimum once a year. At Magellan Financial we believe it is advantageous to take a second look at the mid-year mark as well. This is as true now more than ever, considering recent volatility in equity and bond markets, rising inflationary pressures, and a different legislative agenda in Washington since the last time many investors examined their 401(k) plans. Here are the three questions you should ask yourself as a part of your review:
Have your retirement goals and objectives changed?
As the recent Coronavirus crisis suggests, even carefully designed plans are susceptible to unexpected events. Illness or death of a spouse, changes to the tax code, and rising interest rates can all impact your retirement goals and objectives. However, with thoughtful planning, the adverse consequences from many of these events can be reduced or mitigated. Understanding post-retirement risks and integrating them into your retirement planning is one of the keys to successful retirement planning.
Many of the major retirement plan providers allow you to go to their website and do a basic review of your retirement goals and objectives, allowing you to see if you are saving enough to reach your retirement goals. If your employer’s plan does not have the ability to help you with this you should reach out to a financial advisor for help. Some basic investment planning can go a long way to helping you understand where you are currently are with retirement savings and what you need to do to achieve financial success.
Can you increase the amount you contribute to your 401k?
Under-saving is a real problem. We have never had a retired client complain that they saved too much money during their working years. But don’t think that those who saved well started out saving the maximum amount allowed. What most of our retirement ready clients did was start with a modest savings rate which gradually increased over a few years. Eventually, they reached a level that would sustain them during their retirement years.
If you are saving 5% now, increase it to 6% or 7%. Many of our clients are not spending as much on travel and dining out due to concerns related to COVID-19. Re-route some of that savings toward your 401k. If you are saving $200 per pay period increase it to $225. Do this year after year and you will get to a life-sustaining savings rate. In the process, you’ll gain additional tax benefits for yourself.
Is your Asset Allocation Proper for your current situation?
There are a few common mistakes people make when allocating their assets. Lack of diversification among a number of investment vehicles is an issue for many. In our experience, however, there are many people who either keep their money in the cash option or one of the more “conservative” investment options. Saving for retirement is a long-term endeavor that takes many decades, not months or years. Even when one is close to retirement age the savings is needed to sustain you for twenty, thirty or even forty years. By investing too conservatively the investor limits the investment growth potential. Target Date Funds and other allocation funds are designed to make it easy for you to have an investment designed for your time horizon and risk-tolerance. Before investing in these funds please make sure you understand the risk in the investment approach, the expenses, and how the fund works. With the S&P 500 index up over 16% year-to-date, some investors missed out on significant possible gains.
Bottom Line
Everyone wants to retire and for most of us, that means saving for it inside of an employer sponsored 401k plan. If you are not saving in a plan currently you should be. If you are saving it is important to review your investment to make sure you are on the right track to long-term financial success.
*Asset allocation cannot eliminate the risk of fluctuating prices and uncertain returns. The investment(s) discussed may not be suitable for all investors. Investors must make their own decisions based on their specific investment objectives and financial circumstances.
Not happy with the plan your employer is providing or need help making sure you are on track to retire on your own terms? Magellan Financial can help. To schedule an initial consultation or ask one of our advisors a question, please call us 610-437-5650 or email us at Jon.Soden@wfafinet.com.
The opinions expressed in this report are those of the author(s) and are not necessarily those of Wells Fargo Advisors Financial Network or its affiliates The material has been prepared or is distributed solely for informational purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy.
When considering rolling over your QRP assets, key factors that should be considered and compared between QRPs and IRAs include fees and expenses, services offered, investment options, when you no longer owe the 10% additional tax for early distributions, treatment of employer stock, when required minimum distributions begin and protection of assets from creditors and bankruptcy. Investing and maintaining assets in an IRA will generally involve higher costs than those associated with QRPs. You should consult with the plan administrator and a professional tax advisor before making any decisions regarding your retirement assets.
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