Will Your Holiday Spending Pass This 3
Were heading into the dangerous money season. With the holidays quickly approaching its that annual time of year when the goodness of your heart can lead to very bad results: You overspend on gifts, dining out, or nights out on the town.
First Place To Look: Iras
Contributing to an IRA in addition to your 401 is one option. Whether you contribute to a Roth IRA or a traditional IRA, your money will grow tax-free until you retire just as it does in your 401k. Once you start making withdrawals, you’ll pay income taxes on the money you withdraw from your traditional IRA or 401k, but not on withdrawals from your Roth IRA. However, a Roth doesn’t give you a tax deduction or tax savings in the year in which you make the contribution unlike a traditional IRA or 401.
Always Maximize Your Employer Match
In theory, no one would turn down free money. But thats exactly what many Americans do when they drop the ball on matching retirement funds when an employer offers them.
Many employers will match 50% of money that you, the employee, puts into your 401, up to a specified maximum percentage of your salary.
Ignoring this benefit by either not opting into your 401 or failing to contribute the maximum your employer will match is literally leaving a portion of your salary on the table.
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Look At Lending For Big Returns
Another way to be choosy and to get a potentially hefty return on your investment is with a peer-to-peer lending platform. Options like LendingClub and Prosper are great for lending your money to individuals who need to consolidate debt, fix up their home, or whatever. When you invest in these platforms, you can create a portfolio of loans that you partially help fund, so that you can spread your risk across multiple loans quite easily. These platforms have historically been great for investors and could net you some serious returns.
If You’re Currently Employed
If you have a regular paycheck coming in, and you’re not panicked about losing your job, contribute to both your retirement accounts and emergency savings as you would normally. You may even want to boost both contribution levels a bit if you can.
Keeping three to six months’ worth of expenses in a savings or money market account insulates you from potential loss of income if you do get laid off, Neumann says. “If you don’t have this in place, now is the time to start building that cash savings account,” he adds. Especially since you may end up needing that money for a wide variety of things, including medical expenses tied to coronavrius.
At the same time, this is a great buying opportunity, Barbara Ginty, a CFP and host of the “Future Rich” podcast, tells CNBC Make It. “As a long-term investor, everything just went on sale for you,” she says, adding that this is the time to increase your work retirement contribution and take advantage of the market dip.
Continuing, or increasing, your regular contributions to your retirement accounts is a strategy called dollar-cost averaging. It’s an approach that takes emotion out of the equation because you’re continually investing, week after week, no matter what the market is doing. This way you avoid selling out during market lows and buying in at market highs.
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Options When Employment Ends
There are a number of options an employee can take when leaving the job:
- Roll over to an IRA Rolling 401 assets to an IRA can allow participants to keep the same tax benefits, avoid penalties, choose from a wide range of investment options and, with a Roth IRA, avoid having to take distributions before theyre needed.
- Stay in the old plan Participants may be able to remain in the plan and keep the same benefits, although fees may increase and they wont be able to make contributions.
- Move to a new plan If the participants new employer accepts rollovers, participants can keep the tax benefits while consolidating their retirement plan money.
- Cash out Participants will owe applicable taxes and, if not yet age 59½ , an additional 10% early distribution tax. However, cashing out does give you cash in hand, which may make sense if you need money to take care of current needs.
To learn more about your options, contact your financial professional.
Invest Based On The Time Until You’ll Need The Money
Remember that a 401 is a retirement account, so you should plan not to withdraw money until you are at least 59 1/2. If you’re fairly young now, that means you have a long investing horizon ahead of you. If you’re nearing retirement age, however, your investing horizon is much shorter you will need to start withdrawing that money soon to fund your retirement.
Keep this timeline in mind when determining your risk tolerance. If you’re investing in your 401 throughout your career, your willingness to take risks should change over time. When you’re younger, more of your 401 funds should be invested in the stock market to maximize potential returns. You have time to wait out any downturns. However, as you age, you have less flexibility around market volatility and should shift your funds toward safer investments.
Lower-risk investments such as cash, CDs, money market funds, and bonds present far less risk of loss but also lower rates of return. If you overinvest your 401 funds in safe investments like these, you risk missing out on the wealth-building returns of the stock market.
To make sure you aren’t taking on too much — or too little — risk with your 401, consider this simple formula: Subtract your age from 110 and invest the resulting percentage of your 401 money in the market. A 20-year-old would have 90% of their money in stocks while an 80-year-old would have just 30% of their assets in the market.
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Weigh Your Investment Options
401s tend to have a small investment selection thats curated by your plan provider and your employer. Youre not selecting individual stocks and bonds , but mutual funds ideally ETFs or index funds that pool your money along with that of other investors to buy small pieces of many related securities.
Stock funds are divided into categories. Your 401 will probably offer at least one fund in each of the following categories: U.S. large cap which refers to the value of the companies within U.S. small cap, international, emerging markets and, in some plans, alternatives such as natural resources or real estate. Diversify your portfolio by spreading the portion youve allocated to equities among these funds.
You want to allocate more to the biggest asset classes, like U.S. large caps and international. U.S. small cap, natural resources and real estate are not as prevalent asset classes, so youll take smaller bits of those, Walters says.
That might mean putting 50% of your equity allocation into a U.S. large cap fund, 30% into an international fund, 10% into a U.S. small cap fund and spreading the remainder among categories such as emerging markets and natural resources.
The bond selection in 401s tends to be even more narrow, but generally youll be offered a total bond market fund. If you have access to an international bond fund, you might put a bit of your savings in there to diversify globally.
Consider Balancing With Cds And Securities
Of course, even millionaires have to worry about keeping a balanced portfolio and ensuring that not all of their capital is in riskier investments. Thats where options like CDs and securities come in. These have traditionally been a way to out-earn inflation so you arent losing money with it sitting around. But theyre also much safer than any other types of investments. So be sure you talk to your financial advisor about the best way to utilize tools like these to bring balance to your portfolio.
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Adp Is Transforming The Way People Save For Retirement
ADP is helping participants get retirement ready by putting meaningful tools in your employees hands so they can plan for retirement at their convenience. With a mobile enrollment experience that allows participants to enroll anytime, anywhere and features like the MyADP Retirement Snapshot calculator that allows participants to obtain an estimate of their retirement savings through a series of personalized questions, and targeted messaging that pushes important information to participants, we are always designing for you and your employees.
Mind Your Employers 401 Match
If youre considering a temporary reduction in contributions to your 401, keep your companys matching contribution in mind. You dont want to lower your own contributions so far that you end up leaving money on the table.
Say youre currently contributing 4% of your salary to your 401, and your employer offers a dollar-for-dollar match up to 4% of an employees salary. If you reduce your investment to 2% of your salary, youre leaving that extra 2% match from your employer on the table. Thats not an ideal situation.
Review your 401 plans matching guidelines before making any contribution reductions. If possible, keep your investment percentage at a level where youre getting your employers full match.
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Set Your Contributions As A Percentage Of Your Salary
There are two general ways 401 plans allow people to manage their contributions — either as a specific dollar amount per paycheck or as a percentage of their salaries. If you have the option to enter your contribution based on a percentage of your salary, it’s a good idea to go that route.
If you choose to contribute a percentage of your salary, your contributions will increase automatically as your salary rises over time with yearly adjustments and raises. This can help to scale up your retirement savings goals over the course of your career with minimal intervention on your part.
But Also Know When To Diversify
Young investors in their 20s and 30s want to invest mostly in stocks. But that doesnt mean you should ignore other asset classes like bonds and alternatives. An 80/20 ratio of stocks to bonds is a good benchmark for investors 30 years old and younger.
For more hands-on investors, another thing to consider is the valuation of asset classes at the time youre investing. Although you shouldnt try to time the market, you might reasonably look at the recent run of the S& P 500 and be skeptical of its upcoming near-term performance.
Because youre investing for 30 or more years, this certainly isnt a reason not to invest in stocks, but it might make you consider allocating some of your funds to struggling assets that will come back with time, such as those in Europe .
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Our Take: Start Planning Now
If you have an old 401k plan or are about to leave a job where you contributed to a 401k, give some thought now to how you will handle the money in your account. A rollover IRA is the best option for most people, but a financial advisor can help you determine whats right for your specific situation.
Get Started With A 401
The easiest way to get started saving for retirement is to use the 401 or similar retirement plan provided by your employer. In our 401 world, you have a second job as your own pension fund manager, whether you are prepared to do so or not. Ask your employer for the summary plan descriptionthey are required by law to provide it if you ask for it. Read it and then figure out how to log in to your online account. Learn what your money is invested in and how to change your contribution rate and investments.
In 2020, an employee can contribute up to $19,500 to a 401, and when combined with the employer match, the total annual contribution can be as high as $57,000 . Maxing out your 401 should represent the bare minimum in retirement saving. Yet a third of doctors are not contributing at all.
Inside the 401, you can invest your money in a variety of mutual funds, where your money is pooled with that of other investors and managed by a professional. As employers have realized they have a fiduciary duty to their employees, they are generally providing at least a few of the low-cost, broadly diversified index funds you should be using for the bulk of your investments.
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Rollover The Money Into Your New Employers 401k Plan
If your new employer offers a 401k plan with low costs and a wide variety of investment options, this might be a viable option to consider. However, we generally recommend that people rollover their 401k plans into an IRA as they are usually lower cost and have more investment options, but more on that later.
If you are interested in rolling the money over into your new employers 401k, meet with the HR department or retirement plan custodian to find out more about your new companys plan, including whether you will be allowed to participate as soon as youre hired or will have to work for a certain number of days before youre eligible.
To accomplish this rollover, you will instruct the administrator of your former employers 401k to transfer your assets directly into your new employers plan once your account has been established. Alternatively, you can instruct the former employers 401k administrator to send you a check but you must deposit the funds into your new account within 60 days to avoid paying income taxes and a potential penalty on distribution.
How Much Should I Invest
If you are many years from retirement and struggling with the here-and-now, you may think a 401 plan just isn’t a priority. But the combination of an employer match and a tax benefit make it irresistible.
When youre just starting out, the achievable goal might be a minimum payment to your 401 plan. That minimum should be the amount that qualifies you for the full match from your employer. To get the full tax savings, you need to contribute the yearly maximum contribution.
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Purchase Rental Real Estate
Rental property, which is sometimes called investment property, can provide a stable source of income for retirement.
Investment property is a business, not a get-rich-quick affair. For those with real estate experience or who want to invest time to make it a business, rental real estate can make an excellent retirement investment.
Of course, there will be maintenance costs and unexpected expenses to account for. Before you buy a rental property, you should calculate all the potential costs you may incur over the expected time frame you plan to own the property for. You also need to factor in vacancy ratesno property will be rented 100% of the time.
If youre unsure where to start, there are many outlets you can turn to for advice. Consider reading books on real estate investing, talking to current homeowners who rent out their property, and joining a real estate investment club.
Dont go out and start investing in real estate without doing your homework. It’s a risky way to incur an income, and you need to be completely prepared before investing in real estate.
Why You Should Seriously Consider A Roth 401
You know I love, love, love Roth IRAs. One of the prime reasons being that in retirement you will not owe a penny of tax on your withdrawals. Thats quite different from a Traditional IRA where every penny will be taxed at your ordinary income tax rate.
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Calculate Your Risk Tolerance
All investing is risky and returns are never guaranteed, but it can actually be more risky to keep too much of your savings in cash, thanks to inflation.
Still, you don’t want to go all in on one stock or investment, particularly if a rocky market makes you uneasy and anxious, or likely to do something drastic, like pull your money out of your account.
You’ll want to determine an appropriate asset allocation, or how much of your investments will be in stocks and how much will be in “safer” investments, like bonds. Stocks have the potential for greater returns, but can be more volatile than bonds. Bonds are more stable, but offer potentially lower returns over time.
Financial advisors often recommend using the following formula to determine your asset allocation: 110 minus your age equals the percentage of your portfolio that should be invested in equities, while the rest should be in bonds.
But think about your investing horizon. If you have decades until you’re going to retire , then you can afford a bit more risk. You might choose an 80-20 stock mix for now. When you’re older, you’ll start scaling that back, depending on your goals and, again, your appetite for risk. Experts suggest checking that your investments are properly aligned with your risk tolerance each year and rebalancing as necessary, though how often you actually do will vary based on personal preference.