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How Much Should I Contribute to My 401(k)?

How Much Should I Contribute to My 401(k)?

Apr 2021

The employer-sponsored 401(k) has largely replaced the company-funded pension plan as the primary source of retirement savings for most Americans. Unlike a pension, however, 401(k) benefits are not automatic. Employees must choose whether or not to participate and then decide how much to contribute and how to best invest their contributions.

One of the most important decisions you can make is how much of your earnings to contribute to your 401(k). While the answer to this question depends on your retirement goals, timeframe and income, there are some general guidelines to keep in mind.

Where to Start

Many experts agree that while anything is better than nothing, most workers should shoot for contributing at least 10% of their income to a retirement plan. It’s particularly important to invest enough to take full advantage of any matching contributions that your employer offers.

A matching contribution refers to any money that your employer adds to your retirement account that’s contingent on your own contributions. Sometimes, this is a dollar-for-dollar match. Other times, it may be $.50 on the dollar or some other percentage up to a given amount. Whatever the formula for your company’s match, you should try to invest enough to earn the maximum match offered. This is because the company match is essentially “free money” — and you won’t find a better deal than that anywhere in the investment universe.

Raise the Bar

Once you’re investing enough to benefit from the maximum company match and have gotten your contribution rate up to 10%, challenge yourself to raise the level even higher. Many experts recommend contributing 15% to 20%. If you start investing from the beginning, those early contributions have the greatest potential to grow.

Automate Contributions

Some companies offer automatic acceleration programs that gradually increase the amount of your contributions over time. Speak with your HR or benefits department to see if you can enroll. By making contributions and increases automatic, you can improve your chances of staying on track to fund a comfortable retirement for yourself.

While you may feel it’s challenging to put money aside from your paycheck, many workers find that automatic deductions allow them to acclimate their budgets relatively easily. And if you make it a habit to raise your contributions every time you get a pay raise, you’re less likely to feel like you’re taking a hit.

What If?

If you’re worried about committing to those contributions with each paycheck, don’t be. You can always stop or reduce them. Just because you set the contribution level at 15%, that doesn’t mean you have to keep it there. You may be able to change your contributions online or through your benefits department.

Contributing regularly to your 401(k) can be one of the most important things you do to prepare for a secure retirement. But it’s important to start early and contribute sufficiently to meet your goals. It can be extremely helpful to speak with a qualified financial advisor to help determine what makes sense for you.

Advantages of Opening a 401(k)

Advantages of Opening a 401(k)

Apr 2021

You just started a new job and have come across information about your company’s 401(k) in your benefits paperwork. You may be wondering what exactly it is and whether you should sign up. The 401(k) plan got its name from the portion of the IRS tax code that governs its use. In the past, most employees received guaranteed monthly retirement income through an employer-funded pension plan. But those days are long gone, and the once common benefit has been largely replaced by the employer-sponsored, but employee-funded, 401(k). The good news is that 401(k)s offer a bevy of benefits and advantages all their own. And it’s important to fully understand them when deciding whether to enroll and how much of your income to contribute.

Employee match. Many employers match a portion of their workers’ 401(k) contributions up to a given amount. Sometimes, this is a dollar-for-dollar bonus; other times, it might be a percentage - up to a certain limit. For example, an employer might match $.50 on the dollar for employee contributions up to 6%. It’s important to speak with your HR department or benefits manager to understand what the policy is where you work because the 401(k) match is like getting free money in your retirement account, and you can’t find that guarantee anywhere else in the investment world.

Tax advantages. Pre-tax dollars fund your 401(k) contributions. That means with every contribution, you can lower your tax liability up to the allowable limits. This can help you save significantly over time. Additionally, your investment grows tax-deferred until you start making withdrawals, which are allowed without penalty once you reach age 59½. Contributions up to $19,500 are tax deductible in 2020.

After-tax contributions. It’s permissible to contribute even more than $19,500, although those additional dollars are not tax-deductible. In 2020, the IRS allows workers to contribute up to $57,000 in combined employee and employer contributions yearly to their 401(k) account. For those aged 50 and older, the limit goes up to $63,500.

Catch-up contributions. If you’ve fallen behind on your retirement-savings goals, you’re not alone. Fortunately, 401(k) regulations allow those over the age of 50 to contribute up to an extra $6,000 per year to help make up for lost time.

Fiduciary oversight. Since 401(k) plans are governed by the Employee Retirement Income Security Act (ERISA), your employer is mandated by law to put your interests above their own in terms of managing and administering your 401(k) investments. They’re obligated to make sure costs are reasonable and investment options are varied and appropriate. You may even have access to educational resources or professional investment advice.

Creditor protection.In most circumstances, 401(k) accounts cannot be seized by creditors. However, it’s important to note that there are some exceptions to this rule, particularly when it comes to IRS violations as well as other government garnishments or criminal fines.

Loan accessibility. Many programs allow participants to take a loan out against the funds in their account. However, if a loan is not paid back on time, it’s considered a taxable distribution and subject to the 10% early withdrawal penalty if you haven’t reached age 59½. The IRS permits those who leave their jobs in or after the year they reach age 55 to make withdrawals without penalty (although you must still pay income tax on that withdrawal). For qualified public safety employees, these distributions can occur if you separate from your employer in or after the year you turn 50. You may also be able to access your 401(k) funds without the 10% early withdrawal penalty in the event of a hardship, if you qualify.

Automatic savings. A number of 401(k) plans offer automatic enrollment as well as auto escalation of contributions. If you’re the kind of person who tends to put off making financial decisions, this can help you stay on track toward your retirement goals by getting on board early and raising your contribution levels regularly.

And if you’re worried about committing to making those contributions month after month, it’s important to remember that you can stop or reduce them if your circumstances change, so you’re not locked in. 401(k) plans offer numerous benefits for workers and can help them achieve their retirement goals - but only if they participate.

Sources:

1. https://www.irs.gov/taxtopics/tc558

2. https://money.usnews.com/money/retirement/401ks/articles/2018-09-13/5-benefits-of-a-401-k-plan-you-havent-considered

Hybrid Long-term Care Policies: A Flexible Alternative

Hybrid Long-term Care Policies: A Flexible Alternative

Apr 2021

What if, one day, you can no longer dress yourself or tie your shoes? Someone turning 65 today has an almost 70% chance of needing some form of long-term care (LTC) sometime in the future. And while many receive in-home care from relatives, that’s not feasible for others. They may not have someone who’s able to help, or they may need more care than can be provided at home.

Finding long-term care is hard enough; paying for it can be an even bigger hurdle. Some elect to pay out of their savings. Others rely on a traditional LTC insurance policy; they pay a premium, and the policy pays a defined amount toward eligible in-home care, adult daycare, or Alzheimer’s support if they need it.

One downside of traditional, stand-alone LTC insurance is that, if the policy does not provide a fixed premium, the cost can escalate, sometimes exorbitantly, over time. And that time could be when you’re living on a fixed income and need the benefits.

Recently, a third option has emerged: the hybrid LTC policy, which combines life insurance or an annuity with long-term care. You can pay a lump sum upfront or a fixed premium over time, and you can receive one or the other benefit in return, depending on the policy you purchase. If you never need LTC, the policy can pay income like a traditional annuity or a death benefit like a traditional life insurance policy. If you do need LTC, the policy pays toward those costs in an amount you choose when you buy it. Depending on the policy, money provided for LTC would reduce the annuity or death benefits that you’d otherwise receive.

Return of premium riders on hybrid policies can also return most, if not all, of the premium cost in the death benefit or annuity. At the same time, the total available for LTC might be several times higher than the premium amount, offering additional value.

Hybrid LTC policies are also often purchasable with a lump sum of cash — something less available for traditional LTC insurance — and medical underwriting requirements may be less stringent.

But there are downsides to consider. Lump sum premiums that can run upwards of $50,000 to $100,000 are inaccessible for many individuals, and LTC policy payouts will reduce the cash value of a life insurance policy or the benefits paid to the beneficiary. In addition, with both traditional and hybrid LTC policies, you’re putting your future in the hands of an insurer — are you confident they’ll still be in business when you need them? Check their rating with AM Best, a credit-rating agency that evaluates insurers, before signing on the dotted line.

Sources:

1. https://longtermcare.acl.gov/the-basics/how-much-care-will-you-need.html

2. https://www.kiplinger.com/article/retirement/T036-C032-S014-should-you-buy-hybrid-long-term-care-insurance.html

Short-Term and Long-Term Disability Insurance

Short-Term and Long-Term Disability Insurance

Apr 2021

Most of us expect to work until we voluntarily retire from the workforce. But there are any number of things that can and do prevent people from working: severe accidents, life-threatening illnesses like cancer, or memory loss from Alzheimer’s disease. It’s a long list that’s not fun to think about. Fortunately, there are both short-term and long-term disability insurance policies that can help protect you financially.

What Does “Disabled” Mean?

A wide range of conditions might qualify you for disability benefits. If you’re unable to perform your regular duties more than 15% of the time you’re at work, or you must miss more than 10% of your scheduled work time, you may qualify for disability support. In most cases, you must have solid medical evidence to prove your disability before collecting benefits.

Short Term vs. Long Term

If it’s expected that you’ll recover from your condition within a year or two, that’s generally considered a short-term disability. However, if doctors believe your disability will last longer or is permanent, that may be considered a long-term disability. Short-term policies typically start paying benefits faster — roughly 0-14 days after approval — and benefits might continue for up to two years. Long-term disability policies often have a longer waiting period, but the payments usually cover a more extended period of time.

SSI and SSDI

There are two Social Security programs that provide disability benefits: SSI and SSDI. SSI is a needs-based program for those with lower incomes that the Social Security Administration manages, but its funding is not from the Social Security Trust Fund. Applicants need not have worked or paid Social Security taxes, but they must not have assets worth more than $2,000 ($3,000 for a couple) and earn below a certain threshold of income.

SSDI is a program for those who have a work history that includes paying Social Security (FICA) taxes and generally offers higher benefits than SSI. The longer you work and the more FICA taxes you pay, the higher your benefits can be. However, applicants can’t collect benefits until after a five-month waiting period.

Private Insurance

If you’re employed full time, you may have disability benefits provided by your employer. In California, Hawaii, New Jersey, New York, Rhode Island and Puerto Rico, employers must provide short-term disability insurance. Even if you’re in one of those states, however, you may want to purchase supplemental insurance. Check with your human resources department and make sure you understand your costs, the level of benefits promised, the waiting period before you can claim benefits, and the length of time you can receive benefits.

If your employer doesn’t provide disability insurance, consider purchasing a private policy. Ask the same questions as above. In addition, you want to know the strength of the insurance company (AM Best rates the health of insurance companies) and the conditions that govern the policy. Know whether your policy is non-cancelable (renews at the same price each year and can only be terminated if you don’t pay your premiums) — or whether it is guaranteed renewable (can’t be cancelled but can go up in price). Also ask whether the benefits are guaranteed for some limited number of years, or until your retirement age, or for life.

Is Disability Insurance Right For Me?

Like all insurance, you’re making a wager. You’re betting that, at some point, you might be out of work long enough to need financial help. The insurance company is betting that you won’t. The cost of the policy depends on how the insurance company views those chances and the options you select. Higher benefit levels and longer coverage raise the price.

For help deciding what kind of coverage you might need, set up an appointment with your financial advisor. Have a list of questions, such as how likely you think it is you’ll need disability payments, how much income you’d need and the coverage period you desire. Understanding your options now can help prevent panic decisions later.

Sources:

1. https://www.disabilitysecrets.com/page7-10.html

2. https://www.iii.org/article/what-are-types-disability-insurance

3. https://www.disabilitysecrets.com/page5-13.html

4. https://www.shrm.org/resourcesandtools/tools-and-samples/hr-qa/pages/stateswithstd.aspx

The Risk of Avoiding Risk

The Risk of Avoiding Risk

Apr 2021

What comes to mind when you think of investment risk?

  • Picking the wrong mutual funds for your 401(k)?
  • Buying into a tech bubble?
  • Purchasing a stock based on a tip from your buddy?
  • Having too many stocks in your portfolio too close to retirement?

Indeed, some of these things quite legitimately could be considered risky. But have you given any thought to the risk of doing nothing? In other words, the risk associated with not investing your money, not contributing to your 401(k), not increasing your contributions on a regular basis, waiting to start investing? Or perhaps not even facing the idea of retirement planning at all?

Choices like these may in fact be among the riskiest behaviors of all when it comes to investing.

It's pretty clear that unless you actively take charge of - and plan for - your retirement, no one else will do it for you. And when the day comes that you're no longer willing or able to work, you won't have the funds you'll need to enjoy a comfortable retirement.

It's very easy to let retirement planning become one of those "I'll start next year" items on a perpetual to do list. There may always seem to be a compelling reason that you can't "afford" to take some portion of your earnings and put them away today for tomorrow's retirement. Maybe you're saving up for a car, a vacation you badly need, a wedding or starting a family. Sometimes it can feel like there's just never a good time to start.

According to Vanguard, one person at age 25 who starts putting away $10,000/year into their retirement account for 15 years with an employee match will have contributed $150,000 into their account and end up with more than $1 million by age 40, while someone else who waits until age 35 to start saving at the same rate with the same match over 30 years (twice as long) will have contributed $300,000 during that time, yet their account would only be worth around $838,000 by age 65.

Delaying saving for retirement can cost you - a lot.

Another way that excessive risk avoidance can be a risk in and of itself is when, in an attempt to avoid investment losses, you fail to put yourself in a position to capitalize on upswings in the market. It's important to remember that your gains are always offset by the effects of inflation increasing your cost of living over time. If, for example, you aren't earning 3% interest during a period where inflation is also at 3%, you're not making any headway.

Investing can be intimidating. After all, some degree of risk is inherent in the process. But it's important not to let fear stand in your way of building a solid financial future. Doing things like investing over a longer number of years and at regular intervals (dollar cost averaging) can help even out the bumps along the way.

Gaining an understanding of what exactly you're investing in and the overall allocation of your assets, as well as how a prudent investment plan can help mitigate risk, may help you feel more confident to move forward.

Sitting down with your financial advisor to discuss your concerns, learn about managing risk and invest in a manner that's in line with your individual risk tolerance is a great place to start.

Source:

1. https://investor.vanguard.com/retirement/savings/when-to-start

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