Posted by The TaxAdvocate Group, LLC

How to successfully manage 401K

How to successfully manage 401K

I have seen that people made many mistakes and even good choices during their 30 years working with 401 (k) participants from big companies such as Apple, IBM, AT & T, and many others.

Below you will find my thoughts on how to manage your 401 (k) account to get a balance that will enable you to retire without diminishing your standard of living.

Contribute at least 15%

Rowe Price, Fidelity, and Vanguard say they need to add about 15% of their 401 (k) account each year of their work. Because none of us do this, especially early in the career, I suggest you add more, at least 20%.

When you discover how much you can afford to contribute, remember that these percentages include any contribution from the company. Therefore, if the company you work for or your business shows a 3% match, consider contributing 12% to the recommended 15%.

If you are not at the recommended contribution rate, increase your contribution rate each time you receive an increase. For example, if you get a 3% increase, the savings rate of 401 (k) increases by 1%. This is a relatively easy way to increase your savings while increasing your net salary.

The two most regrets among retirees are: 

a. I should have started saving for retirement on time

b. I would have liked to save more

Do not stop contributing

Many participants feel that they have to give up their contribution to their 401 (k) account for several reasons.

Some stopped contributing because they had lost money with their 401 (k) investments.

Please note that the idea is to buy cheaper and sell expensive. When markets are down, your contributions allow you to buy more shares of your investment at a lower price. Your investment funds have just been sold!

Some members subdue their 401 (k) contributions when they start saving for something else, such as a home, a high school for children, a boat, a vacation, etc. These are not the best reasons to reduce the 401 (k) contribution rate.

However, it sometimes makes sense to reduce or stop contributions 401 (k), for example, if your spouse loses their job.

The problem of reducing or eliminating your 401 (k) contributions is that many of us stop contributing or increasing our contributions when we reach the point where we can contribute more.

Always make sure to collect the company total

Business dollars are free money. Whenever participants ask me what is the easiest thing to do to increase the balance of their 401 (k) plan, they always say, "Do you use the maximum in your business?"

The return on contributions to corporate contributions is usually 25%, 50% or 100% (because this is the coincidence rate). No risk! There is no better investment wherever you are.

Even if you have to reduce your contributions for any reason, never lower them below the maximum contribution rate of the company.

In all the plans I worked with, at least 10% of employees do not contribute enough to get the maximum amount of correspondence. Be sure you are not one of them!

Contributions from Roth 401K

Contribute to at least a portion of your savings by using Roth 401 (k) contributions. Roth 401 (k) accounts may be freely distributed at retirement or free of charge, provided that the account has been in effect for at least five years.

The younger you are, the greater the rate of your 401 (k) is contributions you should make as a Roth 401 (k). Those of you 20 and 30 should probably choose to pay almost 100% of their 401 (k) contributions, such as Roth 401 (k). Think of the considerable budget balance you can create after 30 or 40 years.

If you are 40, 50, or 60 years old, you have to consider the benefits of contributing to Roth 401 by looking at the tax aspects. Can you expect a higher or lower level when you retire? Or, since most of us are currently looking for a 100% replacement income as retirees, will it be in the same tax category?

We live in a time when state tax rates and federal taxes are relatively low. I cannot imagine that tax rates will be lower in 10 years, but it's easy to imagine much higher tax rates in the future.

If you agree that tax rates are now reduced, then it makes sense that your contributions are taxed now (at lower rates) and not at retirement (at higher rates). Therefore, you now want to focus on Roth 401 (k) contributions for 401 (k) pre-tax contributions.

Seek help with investment funds

Whether you consider yourself an investment specialist, seek professional advice to structure your investment mix.

This does not mean you have to hire a financial advisor and pay for it forever. Majority of the 401(k) plans have active websites that allow participants to receive attribution suggestions based on age, gender, and risk taking. Many people refer to this as receiving advice from a "flight consultant." This is a good way to get adequate investment allocations without costs.

A second way to get advice without paying fees is to contact the consultant working with the 401 (k) plan. Each plan has a professional investment partner, and most will speak with participants and provide a free guide.

Finally, if you do not like any of these options, you hire a financial planner at an hourly rate to review your tasks.

All of these approaches are cheap or free. You have no reason not to do it, and the impact on your final balance can be significant.

You must plan to review your tasks every two years, because a change in your family or financial situation (marriage, death of a loved one, loss or gain of work, birth of a child, etc.) may affect your ability to take risks.

Assign your balance to the expiry funds if you want simplicity

Studies have shown that most 401 (k) plan members should allocate their savings to the expected base, which is the year closest to when they turn 65 years old. Many of us are very busy with their lives participating more actively. This is the simplest way to invest in the 401 (k) plan, as there is no need to rebalance or revise the allocation periodically.

There is nothing improper with investing 100% of your balance at the bottom of the target date that matches your age for the entire career.

Annual balance if you are not part of a fund with a specific target

You need to rebalance the suggested investment allocations. Generally, it is easier to do it in a year. Many participants perform this task while preparing the fees.

Most of you can choose to balance your account automatically when you choose your plan site. Typical options include quarterly or annual rebalancing. I suggest you choose each year.

Please do not sell when markets fall

Without a doubt, the most destructive thing participants do to weaken their retirement plan is to sell their capital investments when the stock market collapses.

Please, if you are scared when the market goes down (and I guarantee you it will go down again), you do not sell. Talk to an investment specialist before changing your tasks. Do not be afraid to get advise in these difficult times. The money will be well spent.

Do not borrow capital

This is my second recommendation to maintain balance. It's easy to get a participating loan from your 401 (k) account because there is no signature and the whole process can be done online.

Most people who borrow from participants do not perform well if they unexpectedly lose their job (because the entire balance is due immediately). Also, many people no longer pay for participants' loans when they voluntarily accept a new job.

When we borrow, most of us do not think that employers will change and we are not aware that the unpaid balance is due to the end of our work.

Non-payment of a participating loan determines the immediate imposition of the remaining balance as well as a penalty of 10%. Although you can repay the loan to avoid this situation, hardly anyone does. As a result, these balances are permanently removed from the old savings.

Moreover, although it seems interesting to pay interest, in this case, it is not a smart financial move. Studies have shown that the interest you pay is well below what you earn if you left the money invested in your plan funds.

Do not transfer your account to an IRA

Many participants, when they leave their employer and move to another, decide to transfer the employer's balance before reinvesting the IRA. It's almost always a bad decision.

In most brokerage firms, banks, and insurance companies, the minimum notification rate for transfer balances of less than $ 1 million is 1%. If you transfer your balance to the new employer plan, the consulting fee will stay the same: zero.

Also, almost all of the investment options you must choose in a reinvestment account will be much more expensive than those you would pay with a 401 (k) plan.

I hope you are thinking about following these simple steps to make your dream come true.

The TaxAdvocate Group, LLC
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