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Start or Open a 401(k)

Start or Open a 401(k)

Jul 2021

Let's say you've started your first job. Or, maybe, you've simply started to think about saving for retirement. Your employer offers a 401(k), but you don't know where to get started (or even what that is). Here's everything you need to know.

What Is a 401(k)?

To put it in really general terms, a 401(k) is a retirement savings account offered through your employer. (If you're self-employed, you can open a Solo 401k, but that's a whole separate topic).

You set aside a certain amount of money each month from your paycheck, and use it to invest money through this account. You have the option of investing in a variety of assets (i.e. stocks, bonds, mutual funds). Over time, your money grows. Ideally, when you retire, you'll have a big stack of money that's been growing for years.

The money you earn from your 401(k) investments isn't taxed until you withdraw it—ideally, after you've retired.

Why Do I Want One?

Saving for retirement is boring, but important, and you should do it as soon as you can. Saving even $50 a month can work for you.

With a 401(k), your company might offer to match a percentage of some of your 401(k) contributions. This is basically free money. Also, since the money you invest is 'pre-tax,' you could reduce your annual tax bill. CNN Money explains:

Another benefit to having a 401(k)-retirement plan is having taxes deferred until you withdraw the money at retirement. So, since the 401(k) actually reduces your tax rate, you won't be paying taxes on the money until you withdraw it. Since many people tend to be in a lower tax bracket when they retire, the 401(k) actually has you paying a smaller tax rate on your savings when you take it out of the account.

Of course, you'll eventually have to pay taxes on this money when you retire.

How Do I Pick My Investments?

When you open your 401(k), you'll have to pick your investments. Your employer usually works with an investment broker to come up with a list of options. This means you're stuck with the list they offer, and sometimes, the list isn't great.

Either way, you'll have to pick a fund from this list that's based on a risk level you feel comfortable with. Investor Place runs down the five major types of funds you'll likely have to pick from:

Stock Funds: As the name suggests, this type of fund covers a variety of stocks that you can invest a percentage of your account in. According to Investor Place, Target-Date Funds: These funds are pretty simple and basic. You pick your target date for retirement, then pick the matching fund. Because they're so simple, there's not much maintenance, as the fund adjusts your asset allocation over time. The fees of target-date funds might be higher.

Blended-Fund Investments: These funds have a set ratio of stocks and bonds. You can pick one that's appropriate for your situation. This means you'll have to consider your tolerance for risk and how many years you have until retirement.

Bonds/Managed Income: These are funds are meant to safeguard your money, but your money won't grow much with these funds.

Money Market Funds: Investor Place calls the money market fund a 'glorified CD.' There's zero growth here, and, in fact, these funds barely keep up with inflation rates. They recommend avoiding money market funds if you want your money to grow.

1. https://twocents.lifehacker.com/a-beginner-s-guide-to-starting-a-401-k-1592233003

tags: 401k, starting a 401k

NFPR-2019-80 ACR#324833 09/19

8 Things About 401(k)s Every Baby Boomer Should Know

8 Things About 401(k)s Every Baby Boomer Should Know

Jul 2021

For those considered baby boomers, retirement has now become reality with 10,000 people retiring daily. Unfortunately, research shows that 54 percent of older Americans do not have enough savings to fund their retirement.

If you’re on the pre-retirement end of this age group, it’s never too late to start setting money aside. Here are eight facts about 401(k)s that could help you prepare for your golden years.

Retirement Is Expensive: Although it can vary from one person to the next, the current total cost of retirement is estimated at $738,400.

Social Security Won’t Be Enough: It depends on your income, but even someone earning $100,000 annually will only get $2,670.37 per month. This calculator can help you determine your projected earnings.

The Money Stays with You: The best thing about a 401(k) is that the money travels with you from one job to the next.

It’s Never Too Late: Even those who are over 50 can begin to set money aside in a 401(k). In addition to saving money, you should also look for ways to boost your income during your final working years.

You Can Catch Up: The new tax plan may change this, but those over 50 can make catch-up contributions to make up for lost time.

The Money Won’t Wait Forever: Halfway through your 70th year, you’ll be required to begin withdrawing money from your 401(k).

There Are Penalties for Early Withdrawal: Before retirement age, the money will need to stay in place unless you can roll it over to another type of account.

You Have Investment Options: You may not realize that you can choose where your money goes within your 401(k).

Good fiduciary risk management is about preparing for the future and simultaneously protecting your current finances. If you haven’t begun saving for retirement through a 401(k), it isn’t too late. Check with your employer on available options, talk to an advisor, and take advantage of any opportunities you can find to save.

Tags: social security, retirement

NFPR-2019-85 ACR#324835 09/19

When Does Collecting Social Security Early Make Sense?

When Does Collecting Social Security Early Make Sense?

Jul 2021

Full retirement age (FRA) for Social Security benefits is currently between 66 and 67, depending on when you were born. Benefits are determined based on your 35 highest years of earning on record with the Social Security Administration, but will be higher or lower depending on when you file. If you file at FRA, you’ll get your full monthly benefit.

For each year you delay past FRA, however, your benefit will be increased by 8% until the age of 70. The earliest you can currently file is age 62. For each month ahead of FRA you file, benefits are decreased by a certain percentage. If, for example, you elect to begin receiving benefits at 62 when your FRA is 67, your monthly payment will be approximately 30% lower. But despite this fact, 62 is the most common age to claim Social Security benefits — often because, unfortunately, people are just not in a position to wait.

Determining the timing of Social Security benefits is an important decision that can have lasting consequences. You want to make a choice that’s in your long-term best interest. In many cases, it’s advisable to wait to receive the larger benefit, but everyone’s circumstances are different so it’s a good idea to have a discussion with a qualified financial advisor when determining what’s best for you. But here are some factors in favor of electing to receive benefits early.

You’re currently in or anticipate poor health. If you have a progressive health condition or a family history that makes early health complications more likely, then you may want to consider taking benefits early — while you’re still well enough to take advantage of your retirement years.

You’re unable to continue working and need the money. Job loss and/or disability can sometimes make it unfeasible to wait until full retirement age. If your employer-provided or private disability insurance along with other resources can’t cover your basic needs, then you may have no other option but to collect early.

Your spouse can take benefits later. This approach might let you access some Social Security income immediately, while allowing your spouse’s benefits to continue to grow. You should probably run the numbers with a professional financial advisor, however, to make sure this strategy makes sense in your specific situation.

You have qualified dependents on your tax return. If this is the case, your dependents might qualify for benefits when you take your own. Again, this is another instance where it makes sense to have an expert help determine if this is in your best interest.

You can afford to. If you dislike your job and don’t need the additional funds provided by waiting until your full retirement age or beyond, then you may want to embark on this exciting time of life as early as possible.

Social Security is a central component to most retirees’ financial plan. It’s important to make a thoughtful and well-researched decision regarding how best to use this resource to finance your retirement.

Sources:

https://www.msn.com/en-us/money/realestate/why-do-so-many-people-claim-social-security-at-62/ar-BBTbXg1

2. https://www.investopedia.com/articles/financial-advisors/012216/filing-early-social-securitywhen-it-makes-sense.asp

tags: social security, retirement

Securities are offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services are offered through NFP Retirement, Inc., a subsidiary of NFP Corp. (NFP). Kestra IS is not affiliated with NFP Retirement Inc. or NFP.

This material was created to provide accurate and reliable information on the subjects covered but should not be regarded as a complete analysis of these subjects. It is not intended to provide specific legal, tax or other professional advice. The services of an appropriate professional should be sought regarding your individual situation.

Managing Investment Risks

Managing Investment Risks

Jul 2021

In my opinion, it is impossible to predict future stock market returns. Investment models can produce hypothetical returns but they can’t account for future events. So, in my opinion, investors who manage their investments based on market performance or what they perceive as opportunities for better returns have very little control over the outcome.

On the other hand, there may be market risk, interest rate risk, inflation risk and taxation risk. If your investment portfolio is not vulnerable to market risk it may be vulnerable to interest rate or inflation risk. In my opinion, over the long term, taxes may impede returns and portfolio performance. If it were possible to control the risks to your portfolio, then you could try to improve the long-term performance of your investments.

Understanding all Risks

Some investors understand the concept of risk and reward. The risk of loss associated with the stock market is called “market risk”.

In my opinion, the investors who were rattled from the steep declines in the market during the 2008 crash, and more recently in the August 2011 plunge, may have decided they have little tolerance left for market risk, and some of them may have moved their money to “less risky” investments. The problem for these investors is they have now left their portfolio vulnerable to other adverse risks. Effectively managing all of your risks entails allocating your investments along a mix of assets that can act as counter-weights to the various types of risk. * Inflation Risk There is going to be inflation. When there hasn’t been inflation, there could have been deflation or stagflation, which some would consider to more dangerous conditions for investments. When investors shift their assets to low yielding or fixed yield investments to avoid market risk, they may be exposing them to inflation risk.

Interest Rate Risk

We also know that interest rates may rise; and they could fall. Unlike changes in the direction of the stock market, changes in interest rates could come with some forewarning. For instance, when the economy slows down as it has these last few years, the Federal Reserve may lower interest rates to try to stimulate economic activity. Conversely, when the economy begins to overheat, the Feds may increase rates to try to contain inflation. Generally, when interest rates rise, the prices of debt securities decrease, and in a declining interest rate environment their prices will increase.

People who stash their money in fixed yield vehicles could also be vulnerable to interest rate changes.

Taxation Risk

At one time or another, the IRS will collect its share of your investment earnings. But, as imposing as the tax code is, it may allow investors to use means to minimize taxes. Deferring taxes, which can be done using qualified retirement plans and annuities, enables your earnings to compound unimpeded by taxes so they can accumulate more quickly; however, there is usually a tax consequence when you eventually access those funds. Understanding investment taxation, such as capital gains, loss carry forward, investment income, etc., may affect the longterm growth of your assets.

In my opinion, an effective way to manage and potentially minimize investment risks is through the broad diversification of assets under a long-term investment strategy. Investors should consider their long-term objectives and overall tolerance for risk when selecting investments.

* Diversification does not necessarily produce results.

Tags: risk management, investment risks

Securities may be offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services may be offered through NFP Retirement, Inc. Kestra IS is not affiliated with NFP Retirement Inc., a subsidiary of NFP.

This material was created to provide accurate and reliable information on the subjects covered but should not be regarded as a complete analysis of these subjects. It is not intended to provide specific legal, tax or other professional advice. The services of an appropriate professional should be sought regarding your individual situation.

NFP retirement, Kestra IS and Kestra AS do not provide tax or legal advice. For informational purposes only. Please consult with your tax or legal advisor regarding your personal situation.

NFPR-2019-88 ACR#324839 09/19

Understanding Investment Risk

Understanding Investment Risk

Jul 2021

All investors – be they conservative, moderate or aggressive – need to understand that the level of returns they expect to generate is directly related to the amount of risk they are willing to assume – the higher the return, the higher the amount of risk one needs to take. It probably doesn’t dawn on most people that, regardless of where you put your money, you assume some element of risk. For instance, if you focus solely on keeping your money safe from the possibility of loss, you risk not accumulating enough money to meet your goal. In this case, trying to avoid “market risk” increases your exposure to other types of risk, such as “inflation risk” or “longevity risk.”

Essentially, you need risk in order to generate the level of returns you will need to achieve financial independence. However, risks can be managed far more effectively than investment performance. You can’t predict the direction of the financial markets, or which mutual fund will outperform the others; however, you can manage risk and even have it work for you through proper asset allocation and portfolio diversification. While there is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio, by including a mix of assets and securities that act as counterweights to one another, a risk aware portfolio can potentially help returns wherever they might occur while reducing overall portfolio volatility.

Understanding the different types of risks and how they can individually and collectively impact your long-term investment performance is crucial to constructing a well-conceived portfolio that seeks to maximize your returns while reducing your overall risk.

Different Types of Investment Risk

Market Risk: The risk that most people associate with investing is market risk, the possibility of losing money due to the price fluctuations of the markets. Because it is difficult to know which way prices will move, investors can lose money if the market moves against them. However, losses are only realized if the investment is actually sold.

Inflation Risk: Many risk adverse investors and savers prefer the safety of savings accounts, CDs and government bonds. The risk they face is that the growth of their secured savings doesn’t keep pace with the rate of inflation which will, in effect, reduce the value of their money in the future.

Interest Rate Risk: The prices of interest-bearing securities, such as government and corporate bonds fluctuate in response to the movement of interest rates. As interest rates rise, the prices of these securities will decline. So, it is still possible to lose money. If the bonds are held to maturity, which can be as long as 20 or 30 years, the investor receives the full-face value of the bond.

Taxation Risk: With the possible exception of some tax-exempt bonds, all investments will trigger a tax consequence, either as a result of income earned or capital gains realized from the sale of an investment. Over a long period of time, taxes can adversely impact the return on investment. Additionally, tax laws do change, so if an investment was based on its tax treatment, it could change at some point in the future.

Liquidity Risk: Investors who are concerned with having immediate access to their money need to be aware of liquidity risk. The safest of investments, such as CDs, have some liquidity risk because if it is redeemed too early the investor could lose a part of his principal to early redemption fees. And, even though stocks and bonds can generally be liquidated at any time, investors may be reluctant to do so if they are in a loss position.

When investing, all possible risks should be evaluated against your overall tolerance for risk. The most effective way to manage risk is to invest with your specific goals in mind. Also, having a long-term investment horizon may allow your investments to work through the inevitable down and up cycles of any market.

Tags: risk management, risk, investments


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