Objective information about financial planning, investments, and retirement plans

Review Your 401(k) Account

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For many of us, our 401(k) plan is our main retirement savings vehicle. The days of a defined benefit pension plan are a thing of the past for most workers and we are responsible for the amount we save for retirement and how we invest that money.

Asset Allocation on Wikibook

Managed properly, your 401(k) plan can play a significant role in providing a solid retirement nest egg. Like any investment account, you need to ensure that your investments are properly allocated in line with your goals, time horizon and tolerance for risk.

You should thoroughly review your 401(k) plan at least annually. Some items to consider while doing this review include:

Have your goals or objectives changed?

Take time to review your retirement goals and objectives. Calculate how much you’ll need at retirement as well as how much you need to save annually to meet that goal. Review the investments offered by the plan and be sure that your asset allocation and the investments selected dovetail with your retirement goals and fit with your overall investment strategy including assets held outside of the plan.

Are you contributing as much as you can to the plan?

Look for ways to increase your contribution rate. One strategy is to allocate any salary increases to your 401(k) plan immediately, before you get used to the money and find ways to spend it. At a minimum, make sure you are contributing enough to take full advantage of any matching contributions made by your employer. For 2016 the maximum contribution to a 401(k) plan is $18,000 plus an additional $6,000 catch-up contribution for individuals who are age 50 and older at any point during the year.

Are the assets in your 401(k) plan properly allocated?

Some of the more common mistakes made when investing 401(k) assets include allocating too much to conservative investments, not diversifying among several investment vehicles, and investing too much in an employer’s stock. Saving for retirement typically encompasses a long time frame, so make investment choices that reflect your time horizon and risk tolerance. Many plans offer Target Date Funds or other pre-allocated choices. One of these may be a good choice for you, however, you need to ensure that you understand how these funds work, the level of risk inherent in the investment approach and the expenses.

Review your asset allocation as part of your overall asset allocation

Often 401(k) plan participants do not take other investments outside of their 401(k) plan, such as IRAs, a spouse’s 401(k) plan, or holdings in taxable accounts into consideration when allocating their 401(k) account.

Your 401(k) investments should be allocated as part of your overall financial plan. Failing to take these other investment assets into account may result in an overall asset allocation that is not in line with your financial goals.

Review the performance of individual investments, comparing the performance to appropriate benchmarks. You shouldn’t just select your investments once and then ignore them. Review your allocation at least annually to make sure it is correct. If not, adjust your holdings to get your allocation back in line. Selling investments within your 401(k) plan does not generate tax liabilities, so you can make these changes without any tax ramifications.

Do your investments need to be rebalanced?

Use this review to determine if your account needs to be rebalanced back to your desired allocation. Many plans offer a feature that allows for periodic automatic rebalancing back to your target allocation. You might consider setting the auto rebalance feature to trigger every six or twelve months.

Are you satisfied with the features of your 401(k) plan?

If there are aspects of your plan you’re not happy with, such as too few or poor investment choices take this opportunity to let your employer know. Obviously do this in a constructive and tactful fashion. Given the recent volume of successful 401(k) lawsuits employers are more conscious of their fiduciary duties and yours may be receptive to your suggestions.

The Bottom Line

Your 401(k) plan is a significant employee benefit and is likely your major retirement savings vehicle. It is important that you monitor your account and be proactive in managing it as part of your overall financial and retirement planning efforts.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email.

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Is a $100,000 Per Year Retirement Doable?

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Is a $100,000 a Year Retirement Doable?

A 2013 New York Times article discussed that a $1 million retirement nest egg isn’t what it used to be.  While this is more than 90% of U.S. retirees have amassed, $1 million doesn’t go as far as you might think.  That said I wanted to take a look at what it takes to provide $100,000 income annually during retirement.

The 4% rule 

The 4% rule says that a retiree can safely withdraw 4% of their nest egg during retirement and assume that their money will last 30 years.  This very useful rule of thumb was developed by fee-only financial planning superstar Bill Bengen.

Like any rule of thumb it is just that, an estimating tool.  At you own peril do not depend on this rule, do a real financial plan for your retirement.

Using the 4% rule as a quick “back of the napkin” estimating tool let’s see how someone with a $1 million combined in their 401(k)s and some IRAs can hit $100,000 (gross before any taxes are paid). Note this is not to say that everyone needs to spend $100,000 or any particular amount during their retirement, but rather this example is simply meant to illustrate the math involved.

Doing the math 

The $1 million in the 401(k)s and IRAs will yield $40,000 per year using the 4% rule.  This leaves a shortfall of $60,000 per year.

A husband and wife who both worked might have Social Security payments due them starting at say a combined $40,000 per year.

The shortfall is now down to $20,000

Source of funds

Annual income

Retirement account withdrawals

$40,000

Social Security

$40,000

Need

$100,000

Shortfall

$20,000

 

Closing the income gap 

In our hypothetical situation the couple has a $20,000 per year gap between what their retirement accounts and Social Security can be expected to provide.  Here are some ways this gap can be closed:

  • If they have significant assets outside of their retirement accounts, these funds can be tapped.
  • Perhaps they have one or more pensions in which they have a vested benefit.
  • They may have stock options or restricted stock units that can be converted to cash from their employers.
  • This might be a good time to look at downsizing their home and applying any excess cash from the transaction to their retirement.
  • If they were business owners, they might realize some value from the sale of the business as they retire.
  • If realistic perhaps retirement can be delayed for several years.  This allows the couple to not only accumulate a bit more for retirement but it also delays the need to tap into their retirement accounts and builds up their Social Security benefit a bit longer.
  • It might be feasible to work full or part-time during the early years of retirement.  Depending upon one’s expertise there may be consulting opportunities related to your former employment field or perhaps you can start a business based upon an interest or a hobby.

Things to beware of in trying to boost your nest egg 

The scenario outlined above is hypothetical but very common.  As far as retirement goes I think financial journalist and author Jon Chevreau has the right idea:  Forget Retirement Seek Financial Independence.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Please check out our resources page as well.

Photo credit:  Flickr

Life Insurance Over Age 50 – Approval and Savings Tips

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This is a guest post by Chris Huntley, President of Huntley Wealth & Insurance Services. All opinions and suggestions are his.

One of the most common misconceptions about life insurance is that you can no longer purchase it, or the premiums suddenly skyrocket, the day you hit 50 years old.

In many cases, the exact opposite is true!

In some instances, purchasing life insurance at certain “milestone ages” like 60, 65, or 70, can actually unlock huge savings for you!

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Having said that, purchasing life insurance over age 50 can be a bit of a balancing act, and you’ll need to understand some key factors about how age affects pricing and qualification.

Generally speaking, older age affects:

  • Your premium
  • The types of policies and term lengths you are eligible to buy
  • The health class you can qualify for

Let’s start with the obvious… How premiums increase as we age, and then move to savings opportunities.

The Cost of Waiting

Generally speaking, life insurance tends to become more expensive as you age.

As a rule of thumb, you will likely see the premium for a policy increase in the following increments:

  • Age 50 – 59 will see an increase of between 8 – 10% per year
  • Age 60 – 69 will see an increase of between 10 -12% per year
  • Age 70 – 79 will see an increase of between 12 -14% per year

So, if you are currently age 59 or 69, or approaching another birthday, you may not want to wait to apply for coverage.  Of course, you’ll also want to weigh that decision against the savings tips for waiting, which I’ll cover later.

Qualifying for Life Insurance Over Age 50

While in some ways, qualifying for life insurance over age 50 is easier, there are situations when it is more challenging.

For example, most life insurance policies require that you take a medical exam.

After 50 years of age, the medical exams become a bit more stringent. Your exam might include a resting EKG, even for a small amount of coverage.

If you’re over 70, you might also be required to take a “special senior” exam to test mental cognition.

I once had a 72-year-old declined for coverage because he couldn’t draw the face of a clock with the hands showing the time, 2:40.

The age when these and other tests apply vary, so if you are worried you might be disqualified, speak to an independent agent who can check the exam requirements by carrier, to find the carrier with the “easiest” medical exam requirements.

How Age Affects the Types of Policies Available

When it comes to term life insurance, and particularly the length of the term, those who are over age 50 should know that there are certain age cut-offs where certain terms are no longer available.

For example, in your 50’s, some companies may no longer allow you to buy a 30-year term.  Some carriers no longer offer it at age 50, while for others, the cut-off age could be age 55 or 57.

The same holds true for 20 and 25-year term.  As you get into your 60’s or 70’s you may not be able to buy 20 or 25-year term policies. The point to keep in mind is that ALL insurers have a cut-off point where they will no longer sell certain policies.

If you wait too long to buy your policy, you may no longer have access to the term length you desire and might have to opt for a much more expensive permanent policy, such as whole life or universal life instead.

Now that you understand how waiting to buy life insurance can affect the policies available to you and pricing, let’s discuss some savings opportunities for people over age 50.

How Key Birthdays Can Save You Money on Life Insurance

As stated previously, there are specific birthday milestones after age 50 that can end up saving you a lot of money on life insurance.

This can apply to individuals in a variety of scenarios such as:

  • “Big Boned” or Overweight Individuals
  • Individuals with High Blood Pressure and Cholesterol Levels
  • Individuals with History of Family Illness
  • And more

In all cases below, the savings come from being able to qualify for a better health rating.  As we age, many life insurance companies relax on some health and lifestyle concerns, giving us the opportunity to qualify for better health classes.

And since the name of the game in life insurance is getting the best health rate (better health rating = savings), you need to understand these tricks.

Life Insurance Savings Tips for “Big Boned” Individuals

Whether you’re a few lbs. overweight or more, this single tip can easily save you 25% to 50% on your life insurance premiums.

As it turns out, some companies offer more lenient height/weight guidelines to individuals as they get older, particularly for ages 60, 65, and 70.

For example, a 59-year-old male who is 5’9 and weighs 210 lbs. might qualify for an insurance carrier’s third best health rating.

However, if that same individual was 60 years old, he could qualify for the carrier’s best rating.

Since health classes increase premium by approximately 25% per class, the 59-year-old would have to pay about 50% more than the 60-year-old at the same weight!

If you’re overweight at all and over age 50, it would be worth your time to speak to a knowledgeable independent agent who can shop the market for the company that can offer you the best rate at your age, height, and weight.

Savings Tips for Individuals with High Blood Pressure/Cholesterol Levels

The same lenient guidelines over age 50 apply to those with higher blood pressure and cholesterol levels.For example, let’s use an actual chart from one life insurer for blood pressure. They will give the give the top health rating for:

  • Ages 0 – 60 for blood pressure: 140/85
  • Age 61+ for blood pressure: 150/85

If you are an individual who is age 55 and has a blood pressure reading of 145/83, you would not qualify for the top health rating. But the same individual, who is 61 with the same BP reading would qualify for the top health rating.

The same approach applies to cholesterol levels, and other lab levels.  You can even get more favorable underwriting over age 50 if you’ve had a history of cancer or heart disease in your family.

How to Find Affordable Life Insurance After Age 50

As you can see, every insurer has their own underwriting guidelines for those after age 50, and it’s a bit of balancing to determine when you should apply for coverage.

For example, if you are 58 years old and have a few health conditions, or are a bit overweight, you’ll probably pay more now to purchase life insurance than you will if you wait until you’re 60.

You might even be tempted to hold off any purchase until you hit that milestone age.

However, I never recommend that my clients wait.  A lot can happen if you “chance it”, and wait a year or two to buy coverage.  First of all, you could die without coverage!  Secondly, no one can predict your health down the line and whether you’ll still be insurable.

Best practice is to buy the coverage you need now, and then every year or two, check with your agent for savings opportunities.

Just be sure to use an independent life insurance agent.

Chris Huntley is President of Huntley Wealth & Insurance Services, a life insurance agency based in San Diego, CA, where he specializes in helping individuals with high risk medical issues.  He has been in business for 10 years and is licensed in 48 states.  He also owns eLifeTools, a site dedicated to online marketing for insurance agents.  Chris can be reached on Twitter: @mrchrishuntley

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Please check out our resources page as well.

Denver Wins! Time to Go to Cash?

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The Denver Broncos just won Super Bowl 50 and its looking like Peyton Manning will go out a winner. Good news and a feel good story? Not for investors. The Super Bowl Indicator says a win by an AFC team is a bad omen for the stock market for the year. 

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Super Bowl Indicator

The Super Bowl Indicator says that if a team from the old American Football League (AFL) wins the Super Bowl that the stock market will finish down for the year.

This indicator has held true for 40 of the previous 49 Super Bowls played prior to this one, including the past seven years.

The New York Giants, one of the earliest teams from the NFL, won the Super Bowl in 2008 but as we all recall the stock market had its worst year since the Great Depression with the S&P 500 being down 37% for the year. I guess a little thing like the mortgage fueled financial crises trumps a “sure fire” stock market predictor like the outcome of the Super Bowl.

The January Effect 

The Stock Trader’s Almanac says that if the month of January is down then 75% of the time the stock market will be down for the year.

The January Effect says that stocks that were sold off in December for tax-loss harvesting purposes will rally in January when investors buy them at reduced prices.

With the S&P 500 and the Dow Jones Industrial Average both down over 5% for the month this clearly didn’t happen.

Time to go to cash? 

Clearly investors should not peg their actions to any type of indicator like the Super Bowl Indicator or any of the others of a similar nature that have cropped up over the years.

The best course for investors has always been to have a financial plan, have an investing strategy and stick to their plan.

The Bottom Line 

The Super Bowl Indicator is fun and part of the Super Bowl hype. At the end of the day there is really no correlation between the performance of the stock market and who wins the Super Bowl. Investors should invest based upon their goals, their time horizon and their risk tolerance. I will say this, however. The market will be way up in 2017 after my Green Bay Packers bring the Lombardi Trophy back to its rightful home, Lambeau Field. OK no predictions, I have no idea what the market will do after the Packers win (which is a sure thing, I hope).

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Please check out our resources page as well.

3 Financial Planning Lessons from the Cincinnati Bengals

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Long-time readers of The Chicago Financial Planner know that I am a die-hard football fan and avid supporter of the Green Bay Packers. Come playoff time, I try catch all of the games as they are often memorable. The game this past Saturday between the Pittsburgh Steelers and the Cincinnati Bengals was memorable for the wrong reasons if you are a Bengals fan.

Rarely, if ever, in my 50 years of watching NFL games have I ever seen a team give away a game (especially a playoff game) in such a bonehead fashion as did the Bengals. Besides some just plain dumb moves, the level of dirty play and bad sportsmanship was disgusting.

What can we learn from the Bengals about financial planning? Here are 3 financial planning lessons from the Cincinnati Bengals.

Protect your downside 

The Bengals had gained the lead in the final quarter after being held scoreless for the first three quarters of the game. On what should have been a routine running play, (in the Steelers end no less) to try to run the clock out, the Bengals’ running back fumbled. In this situation ball security should have been his first priority, not gaining any yardage.

Unless you are very young, most investors are wise to diversify their portfolios in order to dampen the impact of market declines like the financial crisis or even the market volatility that we’ve seen since the start of the new year.

Keep your emotions in check 

Cincinnati linebacker Vontaz Burfict made a key interception that looked like it might seal an improbable comeback win for the Bengals. After the fumble mentioned above, he proceeded to make one of the absolute dumbest and dirtiest hits to the head of a Steelers receiver resulting in a key 15-yard penalty.

His teammate (and I’m sure fellow Mensa member) Adam Pacman Jones then garnered another 15-yard penalty for shoving a Pittsburgh assistant coach during an on-field altercation that set-up a chip-shot game winning field goal for the Steelers.

Burfict is known as a loose cannon and has been fined in the past and Jones is not a choir boy either. Both personal fouls can be attributed to a combination of bad judgment and a failure to keep their emotions in check in a key situation.

Investors need to stay calm during periods of upheaval in the economy and the financial markets. So far 2016 has started off with roughly a 5% loss in some the major market averages.

Back in 2008 and early 2009 the financial press was filled with stories of investors who panicked and sold out of their stock holdings, including mutual funds and ETFs, at or near the bottom of the market. Many of these investors stayed out missing all or most of the six plus year rally we’ve seen since the lows of March 9, 2009. Sadly, for those who were near retirement they booked substantial losses and never gave their portfolios a chance to recover.

Investors need to stay calm. One way to help in this area is to have a plan. Have an asset allocation that that reflects your situation including your time horizon for the money and your risk tolerance. Review your portfolio at regular intervals and rebalance as needed. A plan does not eliminate market volatility or the stress that it can bring, but it can help to prevent you from acting on your emotions, usually to your detriment. 

Build a team that you can depend on 

While both Burfict and Jones are talented players, both have a history of issues. Jones has been in trouble with the NFL for off-field activities and has been suspended by the league in the past. Burfict was suspended for this hit and has been fined for prior transgressions. He was undrafted, many say as a result of a reputation for being hard to deal with.

As a viewer of the game I would say these two players let their teammates and fans down at the most critical point in the most important game of the season. The Bengals have not won a playoff game since 1991 and their comeback to take the lead and put themselves into a position to win was heroic, only to be destroyed by the lack of self-control of these two.

In the course of accumulating money for goals such as retirement and college for your kids, many of you will seek advice along the way. In doing so it is important to build a team of advisors and partners that you can trust.

If a financial advisor is needed be sure to choose a fee-only advisor. This isn’t to say that one who derives some or all of their compensation from the sale of financial products isn’t competent, but someone who doesn’t have the conflict of interest inherent in the sale of financial products starts out as more objective.

Find an investment custodian who has reasonable fees and offers the types of investments and accounts that meet your needs. Free ETF platforms are nice, but who cares if the ETFs on the platform are not the ones that are right for you.

Other advisors might include a CPA or an attorney to handle estate planning matters.

In all cases don’t be afraid to ask questions. In the case of a financial advisor it is important to understand if they have worked with clients in similar situations as you and to understand what you will receive for the fees paid.

The Bottom Line 

As I’ve written here in the past, football and the world of financial planning and investing have some similarities. Learn from the Cincinnati Bengals and be sure to protect your financial downside, keep your emotions in check and build a team that you can trust. These steps will put you on track towards achieving your financial goals.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email.

American’s Attitudes About Their Money

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Americans have varying attitudes about their money. The infographic below sheds light on our attitutudes about our finances across various demographic lines including age and income level.

Please take a look and see how your attitudes about your finances compare.

It’s never too late to get started on your financial plan.  Its never to late to move forward and to take the actions needed to get your financial situation on track whether you need to prepare for retirement or beef up your emergency fund.

Please contact me with any questions you may have or with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner.

personal finance
Source: Masters-in-Accounting.org

 

Financial Planning Steps for the rest of 2015

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Labor Day is here and the college football season started with our local Big 10 team Northwestern scoring an upset win over a ranked Stanford team. Next weekend is the first full weekend of NFL football with my Green Bay Packers visiting Soldier Field where they should continue their winning streak over the hapless Bears.

With a bit less than a third of 2015 left there are a number of financial planning steps you should be taking between now and the end of the year. Frankly I wrote a similar piece at this time last year Eight Financial To Do Items for the Rest of 2014 and I would encourage you to check this piece out as these eight items are just as applicable in 2015. The eight items (for those who prefer the Cliff Notes version) are:

While all eight of these items are critical financial planning steps to be tended to or at least reviewed this year or in any year, the environment in the financial markets has changed from this time a year ago.

August and so far early September has proven to be a rough patch for the stock market with much volatility and pronounced drops from highs reached earlier in 2015. The financial press is filled with stories about what to do and this has become a major event for the cable financial news stations.

In this context here are a few thoughts regarding some financial planning steps for the rest of 2015.

Get a financial plan in place or update your current one 

To me a comprehensive financial plan is the basis of an investment strategy and frankly all else in your financial life. If you have a plan in place, revisit it. If you don’t this is a great time to find a qualified fee-only financial planner and have one done.

Where are you in terms of financial goals like retirement and saving for your children’s college education? Do you have an estate plan in place?

With the markets taking a breather this is a good time to see where you are and what it will take to get you where you want to be financially. An investment strategy is an outgrowth of your financial plan and this plan is something to fall back on in times of market turmoil like the present.

Review your investments and your strategy 

How has the recent market decline impacted your asset allocation? Does your portfolio need to be rebalanced? Is your asset allocation consistent with your goals, risk tolerance and time horizon as outlined in your financial plan?

While I don’t advocate making wholesale changes to your portfolio based on some temporary stock market volatility it is always appropriate to do a periodic review of your overall portfolio, your asset allocation and the individual holdings in your accounts. These include mutual funds, ETFs, individual stocks and bonds and so forth.

The recent weakness in the markets may have created some opportunities for year-end tax loss harvesting in your taxable accounts. This refers to selling shares that show a loss to realize taxable losses. If you want to do this but also want to continue to own these or similar investments be sure to consult with a financial or tax advisor who understands the wash-sale rules.

More likely you have many investments that have appreciated nicely and these represent and excellent vehicle to make charitable contributions. Not only do you receive a tax deduction for the value of the gift, but you eliminate the tax liability for any capital gains on the holdings. 

Review your 401(k) 

The current situation in the stock market is a good time to check your account and rebalance your holdings if needed. Better yet if your plan offers it sign up for automatic rebalancing so you don’t have to worry about this.

Fall open enrollment is often the time when companies roll out any changes to the plan in terms of the investments offered, the company match or other aspects of the plan. Additionally most plans were required to issue annual disclosures by the end of August so be sure to review yours to see where the investments offered are compared to their benchmark indexes and how much they are costing you.

Lastly check to see how much you are contributing to your plan. If you are not tracking toward the maximum salary deferrals of $18,000 or $24,000 (for those who will be 50 or over at any point in 2015), try to increase your contributions for the rest of 2015.

Summary 

Labor Day is here and summer is unofficially over. Use the remainder of 2015 to tackle these issues and to get your financial situation where it needs to be.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner.

Check out Carl Richards’ (The Behavior Gap) excellent book The One Page Financial Plan. Carl is a financial advisor and NY Times contributor. This is an easy read and offers some good ideas in approaching the financial planning process. 

Reader Question: Do I Really Need a Financial Advisor?

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This question came from a reader who is around 60, works for a major corporation and has retirement assets in neighborhood of $1 million.  He indicated he is looking to either retire or be able to retire in the near future.  His question was in response to my recent request for story ideas and I appreciate this suggestion.  I will address this question largely from the perspective of this person’s situation as this is the type of client I am quite familiar with.

Do I really need a financial advisor? 

Do I really need a financial advisor? The only answer of course is that it depends.  There are many factors to consider.  Let’s take a look at a few of them.

How comfortable are you managing your own investments and financial planning issues? 

This is one of the main factors to consider.  The reader raised the point that the typical fees for ongoing advice on a portfolio of his size would likely be $8,000-$10,000 per year and wondered if the fee is worth it.

Certainly there is the issue of managing his portfolio.  It sounds like he has a significant 401(k) plan balance.  This will involve a decision whether to leave that money at his soon to be former employer or roll it to an IRA.  Beyond this decision is the issue of managing his investments on an ongoing basis.  And taking it a step further the fee level mentioned previously should include ongoing comprehensive financial planning advice not just investment advice.

Since it is likely that his 401(k) contains company stock (based upon who he works for) he has the option of electing the Net Unrealized Appreciation (NUA) treatment of this stock as opposed to rolling the dollars over to an IRA. This is a tactic that can save a lot in taxes but is a bit complex.

Can you be objective in making financial decisions? 

The value of having someone look at your finances with a detached third-party perspective is valuable.  During the 2008-09 stock market down turn did you panic and sell some or all of your stock holdings at or near the bottom of the market?  Perhaps a financial advisor could have talked you off of the ledge.

I’ve seen many investors who could not take a loss on an investment and move on.  They want to at least break-even.  Sometimes taking a loss and redeploying that money elsewhere is the better decision for your portfolio.

Can you sell your winners when needed and rebalance your portfolio back to your target allocation when needed?

Do you enjoy managing your own investments and finances?

This is important.  If don’t enjoy doing this yourself will you spend the time needed not only to monitor your investments but also to stay current with the knowledge needed to do this effectively?

In the case of this reader I suggested he consider whether this is something that he wanted to be doing in retirement.

What happens if you die or become incapacitated?

This is an issue for anyone.  Often in this age bracket a client who is married may have a spouse who is not comfortable managing the family finances.  If the client who is interested and capable in this area dies or becomes incapacitated who will help the spouse who is now thrust into this unwanted role?

Not an all or nothing decision

Certainly if you are comfortable (and capable) of being your own financial advisor at retirement or any stage of life you should do it.  This is not an irreversible decision nor is there anything that says you can’t get help as needed.

For example you might hire a financial planner to help you do a financial plan and an overall review of your situation.  You might then do most of the day to day work and engage their services for a periodic review.  There are also financial planners who work on an hourly as needed basis for specific issues.

Whatever decision that you do make, try to be as objective as possible.  Have you done a good job with this in the past?  Will the benefits of the advice outweigh the fees involved?  Are you capable of doing this? 

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Please check out our resources page as well.  

7 Tips to Become a 401(k) Millionaire

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According to Fidelity, the average balance of 401(k) plan participants grew to a record high of $91,300 at the end of 2014.  This data is from plans using the Fidelity platform.

According to Fidelity about 72,000 participants had a balance of $1 million which is about double the number at the end of 2012 and about 5 times the number at the end of 2008.  What their secret?  Here are 7 tips to become a 401(k) millionaire or to at least maximize the value of your 401(k) account.

Be consistent and persistent 

Investing in your 401(k) plan is more of a marathon than a sprint.  Maintain and increase your salary deferrals in good markets and bad.

Contribute enough 

In an ideal world every 401(k) investor would max out their annual salary deferrals to their plan which are currently $18,000 and $24,000 for those who are 50 or over.  If you are just turning 50 this year or if you are older be sure to take advantage of the $6,000 catch-up contribution that is available to you.  Even if you plan limits the amount that you can contribute because of testing or other issues this catch-up amount is not impacted.  It is also not automatic so be sure to let your plan administrator know that you want to contribute at that level. 

According to the Fidelity study the average contribution rate for those with a $1 million balance was 16 percent, while the average contribution across all 401(k) investors they surveyed was about 8 percent.  The 16 percent contribution rate translated to a bit over $21,000 for the millionaire group.

As I’ve said in past 401(k) posts on this site it is important to contribute as much as you can.  If you can only afford to defer 3 percent this year, that’s a start.  Next year try to hit 4 percent or more.  As a general rule it is a good goal to contribute at least enough to earn the full matching if your employer offers one.

Take appropriate risks 

As with any sort of investment account be sure that you are investing in accordance with your financial plan, your age and your risk tolerance.  I can’t tell you how many times I’ve seen lists of plan participants and see participants in their 20s with all or a large percentage of their account in the plan’s money market or stable value option.

Your account can’t grow if you don’t take some risk.  

Don’t assume Target Date Funds are the answer 

Target Date Funds are big business for the mutual fund companies offering them.  They also represent a “safe harbor” from liability for your employer.  I’m not saying they are a bad option but I’m also not saying they are the best option for you.

I like TDFs for younger investors say those in their 20s who may not have other investments outside of the plan.  The TDF offers an instant diversified portfolio for them.

Once you’ve been working for a while you should have some outside investments.  By the time you are say in your 40s you should consider a more tailored portfolio that fits you overall situation.

Additionally Target Date Funds all have a glide path into retirement.  They are all a bit different, you need to understand if the glide path offered by the TDF family in your plan is right for you. 

Invest during a long bull market 

This is a bit sarcastic but the bull market for stocks that started in March of 2009 is in part why we’ve seen a surge in 401(k) millionaires and in 401(k) balances in general.  The equity allocations of 401(k) portfolios have driven the values higher.

The flip side are those who swore off stocks at the depths of the 2008-2009 market downturn have missed one of the better opportunities in history to increase their 401(k) balance and their overall retirement nest egg.

Don’t fumble the ball before crossing the goal line 

We’ve all seen those “hotdogs” running for a sure touchdown only to spike the ball in celebration before crossing the goal line.

The 401(k) equivalent of this is to just let your account run in a bull market like this one and not rebalance it back to your target allocation.  If your target is 60 percent in stocks and it’s grown to 80 percent in equities due to the run up of the past few years you might well be a 401(k) millionaire.

It is just as likely that you may become a former 401(k) millionaire if you don’t rebalance.  The stock market has a funny way of punishing investors who are too aggressive or who don’t manage their investments.

Pay attention to those old 401(k) accounts 

Whether becoming a 401(k) millionaire in your current 401(k) account or combined across several accounts the points mentioned above still apply.  In addition it is important to be proactive with your 401(k) account when you leave a job.  Whether you roll the account over to an IRA, leave it in the old plan or roll it to a new employer’s plan if allowed do something, make a decision.  Leaving an old 401(k) account unattended is wasting this money and can be a huge detriment to your retirement savings efforts.

The Bottom Line 

Whether or not you actually amass $1 million in your 401(k) or not the goal is to maximize the amount accumulated there for retirement.  The steps outlined above can help you to do this.  Are you ready to start down the path of becoming a 401(k) millionaire?

Please feel free to contact me with your questions. 

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