Are You Prepared For Retirement
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This material is not a recommendation to buy, sell, hold, or roll over any asset, adopt an investment strategy, retain a specific investment manager or use a particular account type. It does not take into account the specific investment objectives, tax and financial condition or particular needs of any specific person. Investors should discuss their specific situation with their financial professional.
Life and annuity products are issued by Nationwide Life Insurance Company or Nationwide Life and Annuity Insurance Company, Columbus, Ohio. The general distributor for variable products is Nationwide Investment Services Corporation , member FINRA, Columbus, Ohio. The Nationwide Retirement Institute is a division of NISC. Nationwide Funds are distributed by Nationwide Fund Distributors, LLC, Member FINRA, Columbus, OH. Nationwide Life Insurance Company, Nationwide Life and Annuity Company, Nationwide Investment Services Corporation and Nationwide Fund Distributors are separate but affiliated companies.
The Nationwide Group Retirement Series includes unregistered group fixed and variable annuities issued by Nationwide Life Insurance Company. It also includes trust programs and trust services offered by Nationwide Trust Company, FSB.
Contact Your Hr Department
If you don’t know where to check your 401 balance, your HR department can at least direct you to the entity that manages your company’s 401 plan. Then, you can contact the 401 plan administer by phone or over the internet to check the balance of your 401 plan. You can also check how the money is invested and whether it’s time for you to rebalance your portfolio.
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When Determining Your Contribution Percentage Consider Automatic Boosts
In 2019, the average 401 contribution was 7 percent of pay, according to Vanguard 401 data. Meanwhile, only 21 percent of 401 participants saved more than 10 percent of their salary for retirement.
If you can’t afford to contribute that much initially, many employers will allow you to increase your contribution percentage automatically each year , which may be a more comfortable and gradual way to increase your contribution amount.
A 401 can be one of your best tools for creating a secure retirement. But you may want to also consider some retirement investing alternatives.
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K Administrative Fees: The Ultimate Parasite
Then theres this lovely side of 401ks: The administrative fees from Hell. These are the so-called costs to maintain and deliver a 401k plan to John Q. Worker Bee. Its a revenue-generating cut of your savings that your employer ponies-up to its 401k plan provider. In general, if you work for a large company , your odds of lower administrative fees are decent .
Contrast that with small employers of 100 or less, where the fees could range as high as 0.75% to 1.0% Thats simply because the smaller the company, the less bargaining power they have with a fund provider like a Fidelity or Schwab. Do your homework, and figure out how much of your 401k kitty is getting skimmed for those fees. A 1.0% chop off the top can gouge you for over half a million dollars throughout a career.
What else can you do? Besides finding an employer with a better plan, be sure to study each of the funds available to you within the 401k. In most cases, you will find a fund that simply tracks the total stock market, or S& P 500. Because these so-called index funds are just following what the market does, the administrative lift is minimal, so the fees should be minimal too. I put all of my 6% into a Vanguard large-cap fund that has admin fees less than one-quarter of one percent.
Can You Be Required To Roll Over Your 401
Sometimes you have no choice in the matter. You might be required to roll over your 401 if:
You dont meet a minimum balance requirement. For example, if you have less than $5,000 in your 401, your employer can require you to roll your 401 into a different account.
Your old employer changes 401 providers. Depending on your company, your account may not be rolled over and your existing provider may not continue service. If your account is rolled over, the new provider might have requirements you cant meet, or they might not provide the services you want.
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Contribution Effects On Your Paycheck
An employer-sponsored retirement savings account could be one of your best tools for creating a secure retirement. It provides two important advantages:
- All contributions and earnings are tax-deferred. You only pay taxes on contributions and earnings when the money is withdrawn.
- Many employers provide matching contributions to your account, which can range from 0% to 100% of your contributions.
Use this calculator to see how increasing your contributions to a 401 can affect your paycheck as well as your retirement savings.
This calculator uses the latest withholding schedules, rules and rates .
Contribution Limits For Highly Compensated Employees
Some 401 plans have extra contribution limits on employees who are highly compensated. plan and you are a high earner, these limits may not apply to you.)
Highly compensated employees can contribute no more than 2% more of their salary to their 401 than the average non-highly compensated employee contribution. That means if the average non-HCE employee is contributing 5% of their salary, an HCE can contribute a maximum of 7% of their salary. In addition to the federal limit, your company may have specific caps established to remain compliant.
The IRS determines you are a HCE if:
Either you owned 5% or more of a company last year and are participating in its 401 plan this year.
Or you earned $125,000 or more in 2019 for $130,000 in 2020 from a company with a 401 youre participating in this year.
Unlike most other 401 limit guidelines, HCE classifications are based on your status from the previous year. For the 2021 plan year, the employee compensation threshold rises to $130,000 in 2020.
If HCE contribution rates exceed non-HCE contribution rates by more than 2%, companies workplace retirement plans may lose their tax-advantaged status. As a HCE, you may be prevented from contributing to your 401 to the employee contribution max due to low 401 participation rates. You should still be able to make catch-up contributions on top of your HCE cap if you are eligible, though.
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Increase Your Income If Need Be
Sometimes a lack of retirement savings is caused by mismanaged income. Its common to get caught up in everyday frivolous spending that seems harmless but causes major savings deficits over the years.
Other times there is a real lack of income that has caused a persons inability to save for retirement.
If youre managing your money well and minimizing waste but dont make enough to save what you need to save for retirement you may need to increase your income.
Luckily, there are several options for boosting your income:
- Get a part-time job
- Sell unwanted items
Then take that cash and use it to fund your 401k or other retirement accounts.
However, its important to remember that as you increase your income, you need to be sure to take that extra money and target it all toward retirement savings.
It might be tempting to use it for fun stuff like vacations and new and shiny things especially if youve been living on a tight budget for a long period of time.
Dont make that mistake. Instead, commit to funneling all extra income into your 401k or other retirement accounts, even if its only for a specified period like five years or ten years.
After that time is up, youll likely see a significant increase in your retirement savings. That increase will help ensure you wont be struggling to live in your later years.
Rollover To A Roth Ira
Rollovers are a great time to alter the tax treatment offered by your retirement account, such as rolling your 401 funds over into a Roth IRA. Its a beneficial choice for many retirement savers, but it may be especially appealing for people with high incomes who may not be able to otherwise save in a Roth IRA.
This type of rollover can also help you avoid required minimum distributions that come even with a Roth 401.
However, there will most likely be tax consequences. Because traditional 401 contributions are made with pre-tax dollars, you will owe income taxes on the funds you convert to a Roth IRA, which holds after-tax contributions.
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What Is A 401 Rollover
A 401 rollover is when you take funds out of your 401 account and move them into another tax-advantaged retirement account. You can roll a 401 over into an individual retirement account or into another 401, most commonly when you get a new job with a new retirement plan. Either way, you should understand the best 401 rollover options for your particular situation.
Check Your 401 Investments
For 401 plans with Fidelity, go to your account and look at your rate of return . Underneath the rate of return click on investment performance and research. Here, there are more details about the performance of each fund.
Some 401 plans offer target date funds which are funds aligned to the assumed year you will retire. If youre enrolled in one of these plans, they tend to come with higher fees but require the least amount of effort from you to maintain. That way, the mix in your portfolio will shift automatically for you as the person who is managing it will change the investments over time. If youd prefer to set it and forget it, you may decide this is worth the higher fees.
If youre not invested in the target date funds, determine how the investments within your 401 plan are performing. While your 401 investments are in it for the long haul, it is always good to look at your investments once or twice or year. Should you be overweight or overweight in certain segments like international, large cap or small cap? Should you change only your future elections or current investments?
Lastly, how many years has it been since youve changed the mix in your portfolio? If you set your portfolio mix 10 years ago, you may be overweight on stocks and need to rebalance your portfolio to include more fixed income.
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Contributions With A Modest Income
The example above suggests you should save at least 5% to 20% of your gross income in a 401k plan, scaling up as your pay increases throughout a career. The assumption is you have two income earners making solid pay and making solid strides in pay increases as the decades roll on. But what if youre a couple where one partner works part-time? What if the economy takes a huge long-term dump on local manufacturing, and you lose your job and are unable to relocate?
The example above assumes a combined income that never exceeds $60,000 gross pay. This family will be hard-pressed to make ends meet and find decent, affordable housing. There wont be any fancy vacations to Disney World or the Mall of America. Take this example with a grain of salt, because theres a lot that isnt factored into the narrative.
One thing thatll pop out is how the power of compounding can work some real magic, given time. Even in the leanest years, where no dollars are contributed to a 401k, this households retirement savings doubled. Thats simply by letting the market do its thing, while your dividends get reinvested during a period of exceptionally strong economic growth.
In this example, the advice is to squirrel away 15% of your gross pay right out of the gates, if at all possible.
When I was making $27,500 per year living as a bachelor in my 20s, I only socked away 8% or $2,200 annually. Why? Well, I had to pay off my student loans of course
K Savings Potential By Age
The following chart depicts 401k savings potential by age, based on several assumptions. So this is how much you could have saved. These numbers can seem high to many people, especially if you are older and started your retirement savings when the contribution limit was much lower. It can still be used as a guide for your target total retirement savings amounts, including your IRA, Roth IRA, and after-tax savings. While its designed for one person, it can also be used as a guide for a married couple if one spouse decides to no longer work.
The assumptions we used for this chart include:
*Generally, financial planners say the expected rate of return for a 401k is between 8% and 10%.
So, how do you stack up? Are you on the high end? The low end? Do you think these numbers are realistic?
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Retirement Plan Fees And Expenses
This section shows a detailed breakdown of fees that were directly debited from your account during the period.
These were listed in the above example chart as Plan Administrative Expenses. This is your share of expenses that everyone in your plan pays.
These normally include day-to-day costs to run the plan, such as legal, accounting, and trustee and recordkeeping costs.
Not all of the 401 fees you are paying are easy to find.
Sometimes, it takes a little more research to understand your true costs in your 401 plan.
As you can see in the disclosure in the fine print below, there may be other expenses paid directly from the investment options you have to choose from, such as revenue sharing agreements, 12b-1 fees, and sub-transfer agent fees.
There are some additional fees that come from the funds themselves.
These fees are called expense ratios.
A quick definition: expense ratios are the total percentage of fund assets used for administrative, management, advertising , and all other expenses.
For example, the 2030 target date fund expense ratio is 0.43% basis points, versus Vanguards Institutional Index expense ratio of 0.04% basis points. The expense ratio of the 2030 target date fund here is 10 times that of the Vanguard Fund.
How does the difference relate to you in terms of actual dollars?
Lets say you had $100,000 invested in both the 2030 target date fund example with an expense ratio of 0.43% and the Vanguard Fund with an expense ratio of 0.04%.
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What If Your Employer Goes Out Of Business
Under federal law, your employer must keep your 401 funds separate from their business assets.
This means that even if your employer abruptly shuts their doors overnight, your money is protected. It cannot be used to pay off your companys loans, cover employee payroll, or for any other purpose.
If your company shut down abruptly, it is possible that a portion of money will be at risk. If your money has been withheld, but has not yet been sent to the 401 plan to be invested, the company could in theory, access those funds.
How To Boost Your Retirement Savings
DON’T know where to start? Here are some tips on how to get going.
- Understand where you start:Before you consider your plans for tomorrow, you’ll need to understand where you stand today. Look into your current pension savings and research when youll be eligible for social security benefits, if at all.
- Take advantage of a 401k: The 401k plans are tax-effective accounts that put you in a better place financially for your retirement. If you save, your employer may too.
- Take advantage of online planning tools: Financial provider Western & Southern Financial Group and comparison site Bankrate have tools that give you an idea of what your retirement income will be based on how much you’re saving.
- Find out if your workplace offers advice: Some employers offer sessions with financial advisers to help you plan for your future retirement.
This tool by AARP, an interest group for over-50s, is similar to Fishers Investments.
On top of the details asked by the latter, it also lets you choose how long your employer matches the contributions.
At the bottom, you can then see the difference if you get employer contributions or not.
If you click on “view report”, you’ll get a chart showing how your money will increase in value over time.
Fidelity’s 401k growth calculator lets you calculate how much money you’ll end up with if you increase your contributions over time.
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