401K Contribution Limits for 2012- Should You Be Contributing?

by Fern LaRocca CFP®

in 401K,401k Contribution Limits

The 401K maximum contribution limit for 2012 is $17,000. That means you can contribut a maximum of $17,000 into your 401K plan. If you are over the age of 50, you are able to contribute an additional $5,500 to the maximum 401K contribution limits. This is called the catch-up contributions because so many people are getting a late start in saving for their retirement. After having saved enough money for emergency cash reserves, this is a great way to invest and see you money grow fast. Why? Because of these three benefits:

  • You contribute with money that hasn’t been taxed yet. Let’s say you earn $45,000 a year and you contribute $5,000 to your 401K plan, you will only have to pay income taxes on $40,000. You pocket the cash that you would have had to pay on that $5,000.
  • You don’t have to pay tax on the earnings in a 401K account. Employee B invests $5,000 in a mutual fund in his 401K. At the end of the year, the mutual fund made a $200 profit and would have been taxed as a capital gain. But since the earnings were in a 401K, there is no tax.  In addition, every year after that, the profits compound over time. Many of my clients are in awe of how much their401K maximum balance has grown over time even though they had some bad years.
  • Your employer may match your contributions up to a certain percentage. Let’s say ABC Corporation will match you up to 3% of your salary that you contribute to your 401K. So if Employee A contributes $3,000, ABC Corporation will also add $3,000 in his account. That is a 100% return on your money. It is hard to beat that kind of return, and foolish not to take advantage of it. Yet studies show that most Americans don’t contribute up to the matching amount.

Many people don’t like the fact that their money is tied up in the 401K plan until they are 59 and a half, but that was what the 401K plan was designed for- long term retirement account. Short term or emergency funds should be elsewhere. Because of the benefits described above you would be foolish not to take advantage of contributing to your 401K plan. Because contributions are taken right out of the paycheck, many clients don’t feel like they miss the money. You can also change your withholding exemptions when you contribute a lot to your 401K so you get a bigger paycheck instead of more tax refund. Your Financial Advisor or Wealth Coach can help you with this or refer you to some IRS worksheets.

 

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Report Finds 401K Investors Staying the Course

by Fern LaRocca CFP®

in 401K

A new Fidelity report finds 401K investors who stuck it out despite the turbulance are being rewarded. Has the tide changed from panic to the quiet storm? I think we will see 200-300 point swings in the market and that can cause havoc to a portfolio that you are going to depend on for income in the future. This 401K report shows investors are getting more savvy and staying the course to get the 401k maximum balance they can.  Yay!

 

 

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Don’t Make These 5 Critical 401K Mistakes

by Fern LaRocca CFP®

in 401K

It is no surprise that a lot of people are depending on their 401K maximum balance to provide income in addition to their social security. That is why you need to make careful choices when you are investing your contributions into your 401K plan at work. Here are 5 of the most common 401K investing mistakes that can deplete your 401K balance quickly:

1)      Don’t take fees into account. You may have a limited number of investment options and you may also have a brokerage option that will give you a lot more choices. Sounds like a no brainer to take the option with more choices. Not so fast. Many of the brokerage options have a mix of load funds (those with an upfront commission or a deferred sales charge) and no-load funds. Are you savvy enough to know the difference? Will you be able to pick out the ones with all those choices that are no-load and have low expense ratios?

2)      Put all of your money in one sector. Good asset allocation means spreading your money around asset classes (large-cap, small cap, foreign, etc.) and asset styles (growth, value). A common error is to put your money into the fund that has the best investment return. This is not a great investment strategy. It is very risky and it doesn’t take advantage of buying low and selling high.

3)      Leave a lot of money in the money market options. Since you can’t touch this money without penalty before age 59 and a half, why keep it in savings accounts? If you are that risk adverse, you should look into stable value funds or funds that invest in US Treasuries. Not having your contributions invested and working for you over time leads to a lot of disappointment when retirement comes and your 401k maximum balance is low.

4)      Switch funds every quarter. Moving in and out of investments is a surefire way to lose a lot of money fast. That methodology is called market timing. It is proven not to work. Now this isn’t the same as reviewing your holdings once a year and determining if your asset allocation is still correct (for example, 60% growth and 40% income) or if the fund’s manager has left and the returns are lot lower than expected due to a new investment policy. That kind of review is important but just darting in and out of funds trying to get the best one is a losing strategy that never works.

5)      Don’t stick to a plan. It is hard to have a long term outlook when the media is screaming at you to buy gold now or sell everything and go into cash. You should ignore all of that and invest according to your financial goals, your tolerance for risk, and your personal tax bracket. If you shoot for nothing, that is what you are going to get. Figure out what is a reasonable return that you can get with the asset allocation that you devise. Let’s say that you decide a 60/40 mix is appropriate for you. With that asset allocation, you determine that you should get 7% over the next ten years.

Don’t make these critical 401k mistakes when you are deciding what to do with your contributions. Even saving and investing 2% of your pay can make a big difference over the long term according to Fidelity. Avoid these 5 critical 401K mistakes and you will be rewarded with a bigger 401K balance that will replace all or part of your paycheck.

 

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New Regulations Might Boost Your 401(k) Balance In 2012

by Fern LaRocca CFP®

in 401k Contribution Limits

Eve Kaplan, CFP(R) Practitioner, (Guest contributor)

The hard-earned dollars you defer each month into your 401(k) are about to get the money equivalent of a face lift in 2012. Why? Fees that affect your net 401(k) plan balance could drop on account of regulatory changes in 2012. These changes force providers to disclose all their fees to your employer and to you for the first time ever.

Knowing what you pay for something gives you the ability to lobby your plan administrator at prove he/she has selected a 401(k) plan that’s delivers good value for money. Plan administrators also can see if their current 401(k) plan is up to snuff.

Here’s how the changes will play out in your 401(k) account next year:

  1. Dept of Labor Regulation 408(b)2 goes into effect April 1, 2012. This regulation requires plan providers (e.g. John Hancock, ING, Hewitt – whoever is listed at the top of your 401(k) statement) to disclose ALL their fees to your employer. (You might be thinking – “doesn’t my employer already know what I’m paying each month for my 401(k) plan”? The answer often is: Not often!)
  2. Your employer also needs to demonstrate it has a process in place to evaluate your 401(k) plan and show it selected a plan with “reasonable and appropriate fees.” Your employer also should confirm if any plan advisors are fiduciaries on your plan or not. (Having an advisor that’s a fiduciary is a good thing for participants and employers because you receive a higher standard of care. Having a 3(38) fiduciary is the platinum standard in the 401(k) industry).
  3. By autumn 2012 you’ll be able to see how much you personally pay for your plan in dollars and cents. Regulation 404(a)5 goes into effect on May 31, 2012, requiring full disclosure of plan fees to participants. By Q3 2012, you will see fees fully disclosed on your Q3 401(k) statement – e.g. $280 for the advisor, $430 for the underlying expense ratio of your investments, etc.

It’s clear the majority of Americans don’t have enough saved in their 401(k) plans to help cover retirement.  Greater fee disclosure and more pressure on employers to pick cost-effective plans should drive overall 401(k) plan costs down, promote transparency and possibly improve quality.

To understand the impact of fees on plan balances, compare Jerry and Lenore. Jerry’s 401(k) at ABC Company has annual plan fees totaling 1.4%. He has $100,000 in his 401(k), will defer $23,000 each year ($17,000 plus $6,000 company match) and will retire in 15 years. He projects his assets will grow by 5% per year, net of fees. Jerry should have $704,200 in pre-tax dollars when he retires in 15 years.

Lenore, by comparison, works at XYZ Company. Her annual plan fees are 2.4% per year (1% per year more than Jerry’s plan). She also has $100,000 in her 401(k), defers $23,000 each year and will retire in 15 years. Since she’s paying 1% more in fees per year than Jerry, her assets are projected to grow by only 4% per year (net of fees). When Lenore retires, she expects to have $640,636.

All things being equal, Jerry should earn $63,564 more in pre-tax dollars than Lenore because his 401(k) plan costs less. Perhaps Jerry will use this to retire 6 months earlier, or take a nice cruise to celebrate his retirement.

We haven’t even addressed a further +1-2% potential rate of return each year in 401(k) plans that have an effective fiduciary advisor present steering participants toward low cost, automatically rebalancing solutions. Automatically rebalanced investments help keep Jerry on track so his 401(k) plan doesn’t drift away from the model portfolio his advisor counseled him to retain. If Jerry has this advice advantage, the additional $64,564 advantage over Lenore could morph into $134,367 more than Lenore by the time he retires (a 6% annual return vs. Lenore’s 4%).

Everyone wins when both you and your employer are clear about 401(k) costs and quality. 2012 is a great time for plan administrators to make sure they are giving their employees a 401(k) plan that’s high in quality – not high in fees.


 

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When Your 401K Maximum Balance Won’t Be Enough

by Fern LaRocca CFP®

in 401K

401k maximum

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Many people are sweating over the fact that their 401K maximum balance at the end of their working years won’t be enough to support the lifestyle that they thought they would have. Let’s not dwell on what you don’t have but let’s discuss some of the options that you do have. I don’t think it helps to pretend that you will worry about that when the time comes- if it ever does. The time to prepare for the shortage is now—while you are working. Let’s take a look at some of the common options that you will have:

Get creative about working part-time during retirement. Most people only have to replace 25% of your current earned income. If so what could you do for 25% of that time and enjoy. You will find that there are more opportunities outside of your current career track that exists and would be even more enjoyable.

Start a business. I am not talking about creating the next Apple Computer, but you could do some consulting, writing, teaching, etc. to earn extra income and not work for someone else.

Are you concerned that your social security will be taxed if you work into retirement? Yes, that is true. But you have to figure that it is also additional income net of tax. It is income you need to supplement your retirement so don’t let the tax liability worry you.

Hold off of taking that early social security at 62 especially if you have the long life genes. If you start taking the higher amount at age 70, by the time you are 78 you will have made up all the lost income from age 62 to age 70 and more.

You are forced to retire at 62 and you don’t have enough income to live on so that social security looks tempting. Don’t do it! Spend down the IRA, investments, 401k maximum balance or other resources. Why? Because those resources have the opportunity to make more money, the social security income will never go up past the rate of inflation.  Is that gambling? No, it is just a calculated risk assessment.

Lifestyle changes, part-time employment or self employment, making the right income choices including social security can make revive any retirement plan.   Even if your 401k maximum balance isn’t what you had hoped for, you do have several options in retirement to make your money last.

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THE 401k FIRST AID KIT:Stop Your Portfolio Bleeding and Get Back to Financial Health

by Fern LaRocca CFP®

in 401K,401k Contribution Limits,401k Contribution Limits,401k limits,401K Maximum,401k Withdrawal,Roth 401K,Roth IRA Rules

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*Scared to open your 401K statement?

Financial Stress

*Don’t think you will ever recover from the losses?

*Too many investment choices and don’t know how to evaluate?

This ebook will help you open your statement, figure out your 401k contribution limits and gain confidence-knowing that your money is working for you- in your time frame, with your risk tolerance, and with the return you need to meet your goals.

You deserve to have confidence in choosing and maintaining the most valuable investment you own-your 401K plan.

Sign up  ( in the box to the right) for my e-newsletter filled with wealth building tips and to buy my eBook:
The 401K First Aid Kit: Stop Your Portfolio Bleeding and Get Back to Financial Health

(Now available at Amazon, too.)

You will also get:

* my most popular report to download now—THE 9 BIGGEST 401K MISTAKES YOU CAN MAKE

* Free Whole-Hearted-Way e-newsletter (written by Fern Alix LaRocca CFP® with over 25 years experience)



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