Now What What Can You Do About Fees
Unfortunately when you have high fees in your retirement plan, theres not much you can immediately do about it. But just the knowledge of your fees will help you answer questions like:
- Should I consider investing in different funds within my plan?
- What should I do with investment dollars after I reach my company 401K match?
- Should I leave my companys 401K plan because of the absurdly high fees?
- Should I divert funds to a discount online stock brokers?
- What should I do with those funds once I leave my job?
Luckily, the tide is turning, and we are seeing new pressure from U.S. lawmakers to make this fee information more apparent. Sites like BrightScope are also doing a good job of exposing the truth about the company 401K plan.
This guest post is from PT Money: Personal Finance. Follow along as PT discusses things like the best places to store your short-term cash, how to spend your money wisely, and the best cash back credit cards to earn more money on your spending.
Average Retirement Income From Pensions
The Pension Rights Center reports that one out of three older adults have retirement income from a pension. This number is trending further downward. Consider yourself extremely lucky if you have this income!
Very lucky in fact: Older adults who have pensions typically have at least twice the income of those living only on Social Security
The median annual pension benefit ranges between $9,262 for private pensions to $22,172 for a state or local pension, and $30,061 for a federal government pension and $24,592 for a railroad pension.
Contributing To A 401 Plan
A 401 is a defined contribution plan. The employee and employer can make contributions to the account up to the dollar limits set by the Internal Revenue Service .
A defined contribution plan is an alternative to the traditional pension, known in IRS lingo as a defined-benefit plan. With a pension, the employer is committed to providing a specific amount of money to the employee for life during retirement.
In recent decades, 401 plans have become more common, and traditional pensions have become rare as employers shifted the responsibility and risk of saving for retirement to their employees.
Employees also are responsible for choosing the specific investments within their 401 accounts from a selection their employer offers. Those offerings typically include an assortment of stock and bond mutual funds and target-date funds designed to reduce the risk of investment losses as the employee approaches retirement.
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Focus On Spending Not Income
It’s wise to base your retirement projections on your level of spending, not on your income.
The Bureau of Labor Statistics saw a 5.4% increase in income and a 7.8% increase in expenditures in their 2019 consumer report, before the financial effects of the 2020 pandemic. Transportation expenditures saw the largest percentage increase with a 10.1% rise. Spending on entertainment dropped by 4.2%, and spending on personal insurance and pensions fell by 1.8%.
Your spending in retirement will most likely not be the same as your spending today. You may not have a mortgage payment at that point in time. Your children may be grown and living on their own, so you’ll no longer have to support them. Costs related to your work, such as childcare, business attire, and commuting costs, will also go away.
But you’ll incur other costs that you may not have to support today. Out-of-pocket prescription and medical costs might become a bigger concern. You may also want to outsource home-related tasks that you currently do yourself, such as cleaning gutters, raking leaves, or shoveling snow. You may choose to travel more, or use your retirement to explore hobbies that you couldn’t pursue during your working years.
How Is An Ira Different From 401k
401K accounts are associated with your employment, as contributions are taken out of your wages before taxes. A traditional IRA is similar to a 401k in that contributions aren’t taxed , but the key difference is that they are independent of your employer. A Roth IRA is also independent, but contributions are made after taxes. Withdrawals from your Roth IRA are tax-free, which makes them a smart choice if you think taxes will be higher in the future.
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What Is The Average Retirement Income For 2022
Reporting on average retirement income can be tricky. The best income data does not include information about whether someone is officially retired or not. Retirement has no official definition with many retirees still working. Retirement is more of a mindset these days. However, for these purposes, well start with statistics for those over 65.
The average retirement income numbers for Americans over 65 seen below come from the US Census Bureau. The most recent data available is from 2020 and compiled in 2021. So, all of the economic changes we have seen over the last year are not necessarily represented in the data below.
The average retirement incomes have dropped. Despite weathering the pandemic, retirees have less retirement income now than the previous year. It remains to be seen if this is a temporary reflection of reduced spending or the reality.
How To Use The Contribution Calculator
This calculator is designed to show you how you could potentially increase the value of your retirement plan account by increasing the amount that you contribute from each paycheck. The Growth Chart and Estimated Future Account Totals box will update each time you select the “Calculate” or “Recalculate” button.
Pre-filled amountsBased on our records, the following information may be pre-filled:
- Pay period. If the information is not available, the default pay period is weekly.
- Your contribution rate. Note that we will use 8% as a default value if your contribution rate is not available or if your contribution is a dollar amount rather than a percentage.
- Years invested
- Your initial balance
You may change any of these values.
Using the calculator
In the following boxes, you’ll need to enter:
- Your expected annual pay increases, if any.
- How frequently you are paid by your employer.
- The amount of your current contribution rate .
- The proposed new amount of your contribution rate. Be sure to verify the maximum contribution rate allowable under your plan. Also, pre-tax contributions are subject to the annual IRS dollar limit.
Pre-tax Contribution Limits 401, 403 and 457 plans
|After 2020||May be indexed annually in $500 increments|
- The length of time that you anticipate you will invest this money.
- The amount of your current account balance.
- Your hypothetical assumed annual rate of return.
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But Why Would I Max Out My Roth Ira Before My 401k If Its So Good
Theres a lot of nerdy debate in the personal finance sphere about this very question, but our position is based on taxes and policy.
Assuming your career goes well, youll be in a higher tax bracket when you retire, meaning that youd have to pay more taxes with a 401k. Also, tax rates will likely increase in the future.
The Ladder of Personal Finance is pretty handy when considering what to prioritize when it comes to your investments, but it is just a tool. For more about the Ladder of Personal Finance and how to make it work for you, check out THIS video where I explain it.
PRO TIP: The video is less than three minutes long. It is worth your time.
Increase Your Deferral Rate
Taking advantage of a company match helps you capture valuable contributions from your employer, but it may not be enough. Many 401 providers recommend saving at least 10% annually over the course of your career.3 But, the average 401 contribution is closer to 6%.4
If you arent able to save 10% to 15% of your pay at the beginning of your career, aim to gradually increase your deferral rate over time. One smart tactic is to boost your 401 deferral rate every time you get a raise or bonus. This enables you to save more without reducing your take-home pay.
Another way to consider for enhancing your savings rate is to increase your deferral rate by 1 percentage point every year. Some companies offer an automatic escalation feature that will periodically increase your savings rate with a simple click of a box other companies require you to manually make this change.
A good time to review your contribution amount is at the beginning of the year when youre looking carefully at other benefits elections, such as medical and dental insurance, since the amount you put towards these benefits will have an impact on your paycheck. Another good time to revisit your contribution amount is when you receive additional compensation, whether through a raise, promotion or bonus.
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Cut Off Date For Making Contributions To 401
Using a 401 plan to save for retirement allows you to put your savings on autopilot with automatic payroll deductions. In addition, you receive tax breaks for your contributions, and the earnings arent taxed until you take distributions from the account. However, to make sure youre on track for the retirement of your dreams, you need to keep tabs on your 401 balance from time to time. In addition to knowing your 401 balance, its also important for you to know how much of your account has vested, especially if youre considering changing jobs in the near future.
Do I Have A 401k I Don’t Know About
If you think that you may have enrolled in a 401K plan with a previous employer, but youre not quite sure, there are a few ways to find out if you did.
The easiest way is to contact the HR department of your former employer and ask them whether you ever contributed to a 401K while in their employment. Youll need to give them your personal details along with the dates that you worked for them, so keep this information to hand.
If your old employer has since gone bust or you cant remember which companies youve worked for in the past, check the National Registry of Unclaimed Retirement Benefits website. Youll be able to see whether youve been listed on their database by your old employer as someone with unclaimed retirement plan funds.
If you havent been listed on the National Registry of Unclaimed Retirement Benefits database, there are a couple more options to explore. Visit NAUPA or missingmoney.comwhere you can search by state based on where youve lived or worked to find out whether any unclaimed assets belong to you.
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Other Benefits Of A 401
Even for employers who do not offer any matching program, every employer with a 401 plan is responsible for administering the plan. That may seem like its no big deal, but it actually saves quite a bit of trouble for the employees. As an employee in a 401 plan, you dont have to worry about the complicated rules and regulations that need to be followed, or about making arrangements with the funds in which you invest your moneyyour employer takes care of all of that for you. Thats quite a bit of saved paperwork.
At the same time, employees who participate in a 401 maintain control over their money. While employers provide a list of possible investment choices, most commonly different sorts of mutual funds, employees have quite a bit of freedom to decide their own strategy. Whether you are willing to take on a little more risk with your investments, or if you would rather play it safe, theres probably an option for you.
Check On Your 401 Periodically
As mentioned, it’s essential to check how much is in your 401 throughout the year. Ideally, more than once, however, annual checks are enough.
The reason to monitor your retirement savings is to keep up with your retirement goals. For instance, as you near retirement, you may want to move your money to safer investments like bonds. Or, if one area has over-performed others, you might decide to reallocate your money to limit your exposure to one category.
Typically these drastic swings in your portfolio won’t happen that quickly. But by scheduling an annual check of your 401 balance, you’ll get a good picture of your 401 portfolio.
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Roll Your 401 Into An Ira
The IRS has relatively strict rules on rollovers and how they need to be accomplished, and running afoul of them is costly. Typically, the financial institution that is in line to receive the money will be more than happy to help with the process and avoid any missteps.
Funds withdrawn from your 401 must be rolled over to another retirement account within 60 days to avoid taxes and penalties.
What Is An Investment Calculator For
An investment calculator is a simple way to estimate how your money will grow if you keep investing at the rate youre going right now.
But rememberan investment calculator doesnt replace professional advice! If you need help with your investments, we recommend working with an expert wholl help you understand what youre investing in. If thats your next step, we can help you connect with a pro near you.
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S To Take Now To Improve Your Retirement Readiness
While the average 401k balance at pre-retirement age is around $600K, that balance still falls far below even the no growth column of the savings potential chart for the same age. And while $600,000 is no chump change, its also probably not enough to retire comfortably for most people.
Needless to say, many people are falling way below their savings potential. But the good news is, its not too late to turn things around.
When Can You Withdraw From Your 401k Without A Penalty
Wondering when can you withdraw from 401k? 59 and 1/2 is the current age when you can take money out of your 401k without incurring a penalty. However, the money you take out is still taxed as income. At the age of 70, you will be forced by the IRS to start taking distributions from your retirement accounts.
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Is Your 401k Savings On Track
Have you met your mark? If you arent there yet, dont panic. These are just rules of thumb. That means they only give you a rough estimate of what you should ideally have by the time you hit these ages. They do not take into account your individual income and experiences or other investments you might have in play.
In reality, theres no one hard answer to how much you should have in your 401k and anyone who tells you otherwise is either lying to you or just doesnt know much about finance. We could pull up a bunch of figures and show you how much someone in their 20s or 30s is saving but that would be a complete waste of time for two reasons:
1. Its impossible to compare two investors fairly. Everyone has their own unique savings situation. Thats why itd just be dumb to compare the Ph.D. student saddled with thousands in student loan debt with the trust fund baby who just snagged a cushy six-figure corporate gig the first month out of college. Theyre both going to save very differently, so its not worth comparing.
2. Most people arent financially prepared for retirement. The American Institute of CPAs recently released a study that found that nearly half of all Americans arent sure if theyll be able to afford retirement. Thats even scarier when you consider the fact that many people underestimate how much theyll need for a comfortable retirement.
Why Are 401k Fees So Hard To Find
Simply put, 401K administrators make it hard to find fees. And before you think Im picking on 401Ks, it applies to Roth IRA and Traditional IRA fees as well. When you first go searching for your 401K plan fees, it can be pretty frustrating. Its not like your 401K administrator or employer sends you a bill at the end of the year that says heres how much you owe us for managing your retirement. Wouldnt it be nice if they treated us this way? But they dont. My opinion is that this setup is a result of the transition from employer-controlled pension funds to employee-directed 401K plans.
Back when there were no 401K plans, there were pension funds. Employers controlled everything with regard to your retirement assets. When the 401K was created, investment companies stepped up to fill the gap as administrators. They, along with the company, set the rules about how to report information to you. Unfortunately, this meant making expenses an afterthought in their communications with employees. And as long as they werent asking, the employers and administrators werent talking about the expenses.
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