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Best For Active Traders: Td Ameritrade
Most retirement-focused investors would do well to stick with a passive investment style. However, if youre into active investing, TD Ameritrade offers industry-leading platform options and tools.
Choose between multiple web, mobile, and desktop platforms
Access the advanced thinkorswim® trading platform with no added costs
Roth contributions and 401 loans are supported
Accounts will move to Charles Schwab in the future
Advanced platforms may be overwhelming for newer traders
TD Ameritrade is another renowned discount brokerage and our choice as best for active traders. It offers an individual 401 account with no recurring fees and commission-free stock and ETF trades. Its solo 401 also supports Roth contributions and 401 loans. Its standout feature for active traders, though, is the thinkorswim® active trading platform, which is available on desktop, mobile, and the web.
Before diving into other details, its important to note that this brokerage has been acquired by Charles Schwab. TD Ameritrade accounts will become Schwab accounts at some point in the future. However, as you can see from its review on this list, were fans of Schwab as well and look forward to seeing the combined capabilities once the integration is complete.
Read our full TD Ameritrade review.
Bitcoin Price Surges To Record High After Tesla Announcement
The price of Bitcoin surged to an all-time high of $48,000, after Tesla, revealed that it had purchased $1.5 billion of the cryptocurrency. In its annual 10-K regulatory filing with the Securities and Exchange Commission , the electric automaker revealed that it had stockpiled Bitcoin as part of its investment strategy.
In the regulatory filing, Tesla divulged that it now held digital assets subject to market volatility:
We hold and may acquire digital assets that may be subject to volatile market prices, impairment and unique risks of loss.
In January 2021, we updated our investment policy to provide us with more flexibility to further diversify and maximize returns on our cash that is not required to maintain adequate operating liquidity. As part of the policy, which was duly approved by the Audit Committee of our Board of Directors, we may invest a portion of such cash in certain alternative reserve assets including digital assets, gold bullion, gold exchange-traded funds and other assets as specified in the future. Thereafter, we invested an aggregate of $1.50 billion in bitcoin under this policy and may acquire and hold digital assets from time to time or long-term. Moreover, we expect to begin accepting bitcoin as a form of payment for our products in the near future, subject to applicable laws and initially on a limited basis, which we may or may not liquidate upon receipt.
This most recent news now begs the question how investors will view the electric automaker.
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Picking Your 401 Investments
A 401 plan typically offers at least 10 or 12 investment funds, though some plans may offer a few dozen choices, including target-date funds. How do you choose among these options?
For many, the limited selection of funds in a 401 may be more of a benefit than a drawback, helping to simplify the process. For experienced investors, a limited fund choice is, well, limiting. These investors might prefer the unlimited selection available in an IRA. But most 401 participants want a good solution rather than a perfect solution .
There are two broad factors that 401 participants should look at:
- Long-term returns: These are the returns on the fund over five- and 10-year periods, as well as since inception.
- Expense ratio: Basically, this is the cost to hold the fund for a year as a percent of the money invested in the fund.
Participants should search for the best returns at the lowest costs, all else equal. Youll have to make a trade-off between the performance and the funds expenses sometimes, too. But it may be worth paying a higher fee for the prospect of much better long-term returns.
Youll want to be careful about buying any fund thats had a good recent performance, such as one- or two-year returns, but has delivered a mediocre performance over longer periods. Many investors make the mistake of chasing a hot fund, only to see its performance drop in the future.
Vanguard Target Retirement Funds: Buy
- Rank among the top 401 funds: #11 #12 #15 #19 #23 , #25 , #29 #65 #82 #88
- Best for: Savers who want to make one investment decision and leave the rest to the experts.
Target-date funds hold stocks and bonds and are designed to help people invest appropriately for retirement. Experts make the investing decisions, rebalance the portfolio when needed and shift holdings to a more conservative mix as you age. When the fund hits its target year, the work doesn’t stop. Vanguard Target Retirement funds continue to shift its blend of stocks and bonds for seven years after the target year. At that point, the money in the fund automatically rolls into Vanguard Target Retirement Income, which holds a static allocation of roughly 30% stock and 70% bond.
A small change is ahead for Vanguard’s target-date funds. The firm actually has two target-date series: the Institutional Target Retirement funds and the Target Retirement funds. They are run with exactly the same strategy, same glide path . But Institutional Target Retirement was created for specifically for defined contribution plans Target Retirement is available to retail investors as well as in some defined contribution plans. Come February 2022, however, the Institutional series will be absorbed into the Target Retirement series and expense ratios across all target-year funds will fall to 0.08%.
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Taxes Eat Into Cpp And Oas Income
According to WealthSimple, CPP pays $689 on average. OAS pays a flat $635 . So, if your CPP is average, and your OAS isnt clawed back, you should get about $1,324 per month.
Sounds like a decent amount, right?
The thing is that CPP and OAS are both fully taxable. CPP is taxed at your marginal tax rate. OAS is also taxed at your marginal rate PLUS has the recovery tax on top of that. If you earn $126,000, your OAS gets clawed all the way back to zero! Of course, if youre earning that much money, then you dont need to worry about CPP and OAS amounts: youre doing fine. But if youre a Canadian relying on just CPP and OAS, then the potential taxes could hit you in the pocketbook.
If you make $1,324 every month, that works out to $15,888 per year. In Ontario, youd pay $1,132 in total taxes on that. So, really, you only get $1,229 per month. Thats a bit of a problem, because the average Toronto apartment now costs over $2,000. Even if you own a home, theres always property taxes and utilities to watch out for. And, of course, groceries, internet, cell phones, etc., all cost quite a bit of money when you put them all together.
Shift Your Asset Allocations As You Near Retirement
So weâve covered the different investment options, how time is your best strategy to weather the stock market storms, and what to do if the stock market does crash. But the absolute best way to protect your 401 from a stock market crash is to limit your risk from one the closer you get to retirement.
Obviously, no one can predict when the next stock market crash will be. So the next best option is to limit the effects of one on your 401 when you donât have as much time to recover before retirement.
If youâre invested in a target-date fund, your investments should already be reallocated to less risky funds, like bonds, the closer you get to 65. If youâre invested in index funds or mutual funds, youâll need to move your money to safer investments yourself. As mentioned earlier, if your 401 provides an online portal, itâs easy to reallocate your assets to lean more towards bonds. If not, your planâs custodian will be able to facilitate moving your money to other investments within the plan.
If your plan doesnât provide investment options that donât satisfy your goals, you can roll over your 401 to an IRA at an outside institution. These investment institutions like Fidelity have seemingly endless investment options to choose from within their IRAs.
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Types Of 401 Investments
The most common type of investment choice offered by a 401 plan is the mutual fund. Mutual funds can offer built-in diversification and professional management, and can be designed to meet a wide variety of investment objectives. Be mindful that investing in a mutual fund involves certain risks, including the possibility that you may lose money.
Your 401 plan may offer other types of investments. Some of the more common ones include:
Mistake #: Not Having A Systematic Formula To Determine What Type Of Funds To Buy And How Much Of Them To Purchase
Many 401k companies today only offer between 5-30 choices for your 401k, yet it can take as many as 6-10 asset classes and 12-15 investments to property diversify your portfolio. Many 401k plans don’t even offer all of the asset classes we use with our clients as options within their plans.
So out of the 10,000 investment options available, you are working with 5-30 choices. I have found most 401k investors choose the funds in their plan based on past performance, tips from fellow employees, and sales material the record keeper of the 401k sends out. Unfortunately, this ends up in an asset allocation disaster.
During my tenure at Fidelity it was easy to spot clients with financial planners because it was obvious when looking at their investments. Less than 5% of the 4500 accounts I saw had what I would consider a good mixture of investments. The company that handles your 401k is getting paid based on the fees they charge your employer AND the annual expenses you pay. Basically, they are making lots of money whether you succeed or fail. If you are still an active employee, don’t expect much help from the firm that handles your firm 401k. They will probably not even contact you until you retire or change jobs, BECAUSE IT IS AT THAT POINT YOU CAN FIRE THEM!
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Basics Of 401 Allocation
When you allocate your 401, you can decide where the money you contribute to the account will go by directing it into investments of your choice.
At a minimum, consider investments for your 401 that contain the mix of assets you want to hold in your portfolio in the percentages that meet your retirement goals and suit your tolerance for risk.
So What Should You Do Right Now To Protect Your 401 From A Stock Market Crash
Protecting your 401 from a stock market crash will depend based on where you are in your career. If youâre younger, you can keep investing more in stocks because you have time to recover from any downturn. If youâre older, moving your money into government and municipal bonds will help shield most of your money from the volatility of the stock market.
Remember, time and consistency will help your 401 grow. If the stock market drops, keeping your money in your 401 is the best strategy. Youâll not only prevent you from cashing out your investments at a loss but will also see your 401 grow when the stock market recovers.
Consider talking to your planâs custodian or a financial planner as you near retirement. Youâll be able to get expert insight on how to best protect your 401 from a stock market crash.
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What Kind Of Investments Are In A 401
A 401 plan will typically offer a range of investments, but any single plan may not offer all possible types of investments. The most common investment options include:
- Stock mutual funds. These funds invest in stocks and may have specific themes, such as value stocks or dividend stocks. One popular option here is an S& P 500 index fund, which includes the largest American companies and forms the backbone of many 401 portfolios.
- Bond mutual funds. These funds invest exclusively in bonds and may feature specific kinds of bonds, such as short- or intermediate-term, as well as bonds from certain issuers such as the U.S. government or corporations.
- Target-date mutual funds. These funds will invest in stocks and bonds, and theyll shift their allocations to each based on a specific target date or when you want to retire.
- Stable value funds. These funds invest in low-yield but very safe assets, such as medium-term government bonds, and the returns and principal are insured against loss. These funds are more appropriate for investors near retirement than for younger investors.
Some 401 plans may also allow you to buy individual stocks, bonds, ETFs or other mutual funds. These funds give you the option of managing the portfolio yourself, an option that may be valuable to advanced investors who have a good understanding of the market.
Construct A Total Return Portfolio
The concept behind total return is that you place money into investments to target a 10- to 20-year average annual return. The annual return should meet or exceed the amount you want to withdraw systematically.
The investments should be split between stocks, bonds, and cash. One common way to create retirement income is to construct a portfolio of stock and bond index funds, or work with a financial advisor who does this. The portfolio should be designed to achieve a long-term rate of return of around 7% to 10%.
For the total return portfolio to work, you’ll need to reallocate capital during its life to match the rate of risk to return. There are many strategies for doing this. One of the most common is the equity glide path strategy, where you adjust your assets based on the criteria of the glide path you choose.
Systematic withdrawals follow a predetermined withdrawal amount. Generally, you take out 4% to 7% of your funds per year and increase your withdrawals annually to account for inflation.
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Best For Small Employers: Employee Fiduciary
Employee Fiduciary has low fees for its 401 plans. The firm invites you to compare their 401 plan against your current plan. It claims to have the same choices as larger firms but with lower fees.
You’ll need $500 to open a plan or $1,000 to convert an existing plan. There are more than 377 mutual funds and ETFs to choose from. It also gives you access to a broker through TD Ameritrade. The fees for its 401 plans are low, and it provides tax return forms and annual report summaries.
The company also sends out benefit statements and has a toll-free number for plan members that need help. Low-cost investment options include Vanguard funds, index funds, and Exchange Traded Funds .
Determine Your Asset Allocation
Asset allocation is the way you divide your money among groups of similar investments or “asset classes.” The three main asset classes are stocksTooltipStocks represent ownership in a company. They can provide both price appreciation and dividend income. Stocks are considered relatively risky, because the stock price may also decrease and there’s no guarantee you’ll be paid dividends. Stocks also tend to be more volatile than bonds. , bondsTooltip A bond represents a loan you make to a government, municipality or corporation . In return, that issuer promises to pay you a specified rate of interest and to repay the face value after a certain period of time, barring default. They can provide income and help balance the risks of stocks. As with any investment, bonds have risks such as default risk and reinvestment risk. and cash investmentsTooltip Cash and cash investments include bank deposits , money market funds and short-term investments . These can provide flexibility and stability. Shorter-term investments tend to have lower returns than longer-term investments. . In general, if you’re a conservative investor looking for income and stability, you may want to hold more bonds than stocks. But if you’re a long-term investor looking for high-growth potential and less concerned about immediate income, you may want to invest more aggressively by holding more stocks. See our model portfolios for sample asset allocation plans.
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Mistake #: Overlapping Investments
Ever wonder why you own 5 mutual funds, but your account either stays flat or goes down? One reason could be your investments are too correlated to one another. This means you can own 4-5 mutual funds, but the funds could be investing in the very same stocks. One great example is Fidelity Magellan and the S& P 500 index fund. Did you know that over the past few years they were 98% the same ‘ only Magellan was three times as expensive’ If you held both funds, you received basically NO diversification. The point behind asset allocation is that by spreading the money in your portfolio around , some areas do well when others don’t.
We have special software and tools which allow us to gauge the overlap of investments inside your account. Therefore we can make sure you are not doubling up on exposure to certain areas of the market. Often we will hear people complain about losing money with their investments. Unfortunately, these people treat investing like a game, and do not take advantage of the time-tested techniques of preserving and protecting their wealth.