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.
A Good Starting Point: Get Your Full Employer Match
If you’re starting a new job and your employer asks how much you want to defer to your 401 from each paycheck, your answer should be at least enough to get your company’s full match. That assumes it offers one, of course. These funds are basically like a bonus for you, but you have to contribute to your retirement account in order to claim it.
Each company has its own matching structure that determines how much it will contribute to your 401. Usually, this involves a dollar-for-dollar match or a $0.50 on the dollar match up to a certain percentage of your income. If your company does a $0.50 on the dollar match up to 6% of your salary and you earn $50,000 per year, you would contribute 6% of your salary, or $3,000. Then, your employer would match half of this, contributing another $1,500 on your behalf. You’re free to contribute more if you want, but you’re on your own from there.
If you’re unsure how your company’s 401 match works, ask your HR department to find out. Then, make sure it’s feasible for you to contribute enough to get your full employer match. If doing so would make it difficult to pay your bills right now, scale your contributions back. The solution below may work better for you.
Should Retirees Invest In Etfs
Exchange-traded funds are one of the easiest ways to diversify your retirement portfolio. ETFs are a great source of passive, diversified exposure to a particular market index, sector or theme. Dividend ETFs can also be a great way to earn low-risk income, especially with interest rates near all-time lows.
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How To Read A 401 Statement Front Page Overview
Not all 401 statements are the same. In fact, there are hundreds of different types of 401 statements based on the company you work for and the plan you are in.
While they might look different, most statement front pages contain the following summary information of your account:
The following is an example of what is on the front page of most statements.
Lets break down each section in detail.
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.
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Use Fidelitys Rule Of Thumb As A Guide
According to Fidelitys viewpoint, retirees should have ten times their income saved by the time they retire at 67. They further explain that you should have:
- 1x your salary by age 30.
- 2x by 35.
- 8x by 60.
- And 10x by 67.
With these numbers, Fidelity is assuming that retirees are targeting to replace 45% of their income from their nest egg and using Social Security to cover the rest of their needed expenses.
These are rough milestones, but use the numbers to see if you need to add more or less to your 401k.
Anything Else I Should Know
Yep. A few things, actually.
Once you contribute to a 401, you should consider that money locked up for retirement. In general, distributions prior to age 59½ will be hit with a 10% penalty and income taxes.
If you leave a job, you can roll your 401 into a new 401 or an IRA at an online brokerage or robo-advisor. The IRA can give you more control over your account and allow you to access a larger investment selection.
401s typically force you to begin taking distributions called required minimum distributions, or RMDs at age 72 or when you retire, whichever is later. You may be able to roll a Roth 401 into a Roth IRA to avoid RMDs.
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Contributions After Age 72
With some retirement accounts, you cannot contribute once you turn age 72, even if you’re still working. That means any money you might have contributed on a pre-tax basis is instead taxed at your current rate. And that’s likely to be higher than the rate you’ll pay once you retire.
Notably, 401s don’t have this drawback. You can continue to contribute to these for as long you’re still working. Even better, while you’re working, you’re spared from taking mandatory distributions from the plan, provided you own less than 5% of the business that employs you.
How Much Should You Put In Your 401k
One of the important questions you need to ask yourself is whether or not you are saving enough in your 401k for retirement. After all, your retirement represents the life you are going to live when you are older and the balance accumulated in your 401k should represent a significant portion of your nest egg. If you want to be able to retire and live the life you want, its important to ask yourself this simple question: how much should I put in my 401k? Consider your options and then make sure you are saving enough.
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Look For Contact Information
If you don’t know how to contact your former employer perhaps the company no longer exists or it was acquired or merged with another company see if you have any old 401 statements. These should have contact information to help put you in touch with the plan administrator.
If you don’t have an old 401 statement handy or yours doesn’t tell you what you need to know, visit the U.S. Department of Labor website and look up your employer. There you should find your old retirement account’s tax return, known as Form 5500. That will most likely have contact information for your 401’s plan administrator.
How To Understand The Details On A 401 Statement
Now that you know how to read and understand the account summary, or cover page, of your 401 statement, its time to dive into the details.
Specifically, the activity, transactions, fees, and investment options inside your 401 statement. This information is usually found on all the additional pages of your statement.
The details inside your 401 statement can be broken down into 6 sections:
The final pages of your statement are typically the customary 401 Statement Disclosures, which may be several pages in length.
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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.
How Much Can You Withdraw From Your 401k After Retirement
How much can you withdraw from your 401k after retirement? The traditional withdrawal approach uses something called the 4% rule. This rule says that you can withdraw about 4% of your principal each year, so you could withdraw about $400 for every $10,000 youve invested.
Can I withdraw all money from 401k after retirement? Special Considerations for Withdrawals. The greatest benefit of taking a lump-sum distribution from your 401 planeither at retirement or upon leaving an employeris the ability to access all of your retirement savings at once. The money is not restricted, which means you can use it as you see fit.
Is there a limit on how much you can take out of your 401k? Theres no limit for the number of withdrawals you can make. After you become 59 ½ years old, you can take your money out without needing to pay an early withdrawal penalty.
Do I pay taxes on 401k withdrawal after age 60? The IRS defines an early withdrawal as taking cash out of your retirement plan before youre 59½ years old. In most cases, you will have to pay an additional 10 percent tax on early withdrawals unless you qualify for an exception. Thats on top of your normal tax rate.
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How Can I Avoid Paying Taxes On Social Security
How to minimize social security taxes?
- Transfer the income-generating assets to the IRA.
- Reduce your companys income.
- Minimize withdrawals from retirement plans.
- Submit your required minimum distribution.
- Make sure you are taking the maximum loss of capital.
At what age is Social Security no longer taxed?
Between the ages of 65 and 67, depending on your birth year, you are at full retirement age and can receive full Social Security benefits tax-free.
Is Social Security taxed after age 70?
Yes. The rules for taxing benefits do not change with the age of a person. Whether your Social Security payments are taxed or not depends on your level of income in particular, what IRS calls your temporary income.
Is there a way to not pay taxes on Social Security?
If you have any taxable income that could affect your AGI calculations, the first thing you can try to avoid Social Security taxes is to make contributions to tax-privileged accounts. This is especially true of Roths accounts. Roth IRA and Roth 401 accounts allow 100% tax-free withdrawals during retirement.
Your Employer’s Contribution Limit
Some employers may have a set limit for the percentage you can contribute toward your 401 each paycheck and, depending on how much you get paid, maxing out your employer’s limit may still not be enough for you to max out the federal contribution limit.
For example, a company may allow employees to contribute up to 50% of their paycheck to their 401 account . Or, they may allow up to a 20% contribution per paycheck. It depends on your company, so be sure to double check.
If you’re maxing out your employer’s contribution limit but you still worry that it’s not enough to help you reach your retirement goals, you can also contribute your post-tax income to a Roth IRA account.
A Roth IRA is another type of retirement account but with slightly different rules s which differ from a Roth IRA). You must open the account on your own is). And instead of contributing pre-tax dollars that you’re taxed on when you make withdrawals in retirement, you contribute after-tax dollars and won’t pay taxes on withdrawals later on.
Also, the contribution limits for an IRA are different from that of a 401 you can contribute up to $6,000 per year to a Roth IRA if you’re under age 50, and $7,000 per year if you’re age 50 or older.
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Matching Contributions: How Much And When
The specific terms of 401 plans vary widely. Other than the necessity to adhere to certain required contribution limits and withdrawal regulations dictated by the Employee Retirement Income Security Act , the sponsoring employer determines the specific terms of each 401 plan.
Your employer may elect to use a very generous matching formula or choose not to match employee contributions at all. Some 401 plans offer far more generous matches than others. Whatever the match is, it amounts to free money added to your retirement savings, so it is best not to leave it on the table.
Refer to the terms of your plan to verify if and when your employer makes matching contributions. Not all employer contributions to employee 401 plans are the result of matching. Employers may elect to make regular deferrals to employee plans regardless of employee contributions, though this is not particularly common.
Average 401k Balance At Age 65+ $471915 Median $138436
The most common age to retire in the U.S. is 62, so its not surprising to see the average and median 401k balance figures start to decline after age 65. Once you reach age 65, there are still several considerations for your retirement, even if you are no longer working and accumulating wealth. Some of these include making decisions about Medicare, creating a plan around withdrawing money from your retirement accounts, and evaluating any additional insurance needs.
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Company Matching Aka Free Money
Because many companies offer their employees a dollar-to-dollar match on 401 contributions up to a certain amount, many employees choose to max out their 401 contributions for the year first, then contribute to another retirement account, such as an IRA. At a minimum, you should aim to contribute enough to take full advantage of your employer match, if they offer one, says Jason DallAcqua, a CFP and president of Crest Wealth Advisors LLC. .
Vested Versus Unvested Amounts
When you find your 401 balance, you might notice that some of the account is vested and some of it isn’t. Amounts that are vested are yours no matter what if you leave the company, you get to take that money with you, but you would lose any unvested amounts. You’re always 100 percent vested in your contributions. However, your employer may make contributions to your 401 plan on your behalf but might put vesting requirements on the money. According to federal law, contributions must vest at least as fast as either the cliff vesting or graded vesting schedules. With cliff vesting, you must be fully vested at the end of three years of service. With graded vesting, you must be 20 percent vested by the end of your second year of service, and must vest an additional 20 percent each year after that, making you fully vested by the end of your sixth year.
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How Much Should You Have In Your 401k By Age
Now that we have established that you need a 401k in your life and explained how much you can contribute, lets talk cash. Aside from investing enough to meet your employer match, how much should you have in your 401k, really?
One way to answer that question is to look at your age.
While there is no one-size-fits-all answer to the question, How much should I have in my 401k? there are some best practices you can keep in mind to guide your efforts. Yes, while you should start investing in a 401k as soon as possible, some people might not get that opportunity right away and thats okay. The point is to do it when you can.
When you do finally start investing, there are a few good rules of thumb to help you make a sound decision on how much you should have in your 401k.
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.
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