Saving for retirement is a hard thing to do. It is also one of the most important things you can do during your working years. To keep yourself at the comfort level you choose, how much money should you save?
There are many things to consider when looking towards the end of your working life, not only how much money will you need, but what will you be spending it on? What will your medical, housing and retirement needs be?
Many American workers are relying on their 401(k) to see them through retirement. Determining what you will need for retirement and making sure you will have that amount in your account is difficult to plan though there are things you can do. Here are some points you need to pay attention to.
- How much can you contribute to a 401(k)?
- What happens If you Overcontribute to your 401k
- How Much Should You Have in Your 401k During Your 20’s, 30’s, 40’s and 50’s?
- Should you Invest in 401(k)
- A 401(k) Calculator
- Basics of 401(k) Allocation
- Does 401(k) Count as Savings?
- What is the Average Retirement Nest Egg?
- Managing Your 401(k) in a Recession
- What Happens to Your 401(k) When You Quit You Job?
- How to Borrow from Your 401(k)
- 401k Organisations
- A Comfortable Retirement
How much can you contribute to a 401(k)?
First things first: In 2020, the most you can contribute to a 401(k) is $19,500 (up from $19,000 in 2019); that limit increases to $26,000 (up from $25,000 last year) if you’re 50 or older. Employer contributions are on top of that limit. These limits are set by the IRS and subject to adjustment each year.
That limit dictates how much you can contribute, but it doesn’t tell you how much you should contribute. To figure that out, consider the following.
If you contributed $19,500 to a 401(k) each year for 35 years and got a 6% average annual return, you’d have over $2.3 million. If your employer matched contributions, that would add to the tally.
But $19,500 a year is a lot of money — especially as an ongoing, year-after-year commitment. It may or may not be enough to fund your retirement, or it could be even more than you need. Your 401(k) contribution amount should be guided by your retirement savings goal.
How much money you’ll need in retirement depends on when you plan to retire, how much of your current income you’d like to replace and how much you want to rely on Social Security.
Most experts recommend saving 10% to 15% of your income, but our suggestion is to get a more detailed goal from a retirement calculator.
What happens If you Overcontribute to your 401k
According to the IRS, if you overcontribute to your 401(k), you’ll have until April 15 of the next year to correct the problem. The IRS advises that employees should contact their plan’s administrator to fix the problem:
The employee should notify the plan and ask that the difference (called an excess deferral) be paid out of any of the plans that permit these distributions. The plan must then pay the employee that amount by April 15 of the following year (or an earlier date specified in the plan).
The excess amount taken out is then included in your gross income for the year in which it was contributed to the 401k, according to the IRS. The interest earned on the amount that is withdrawn from the 401k, however, is taxable in the year in which it was taken out.
So, let’s say you accidentally contributed $500 over the limit between two employer plans in 2016. You’d have until April 15, 2017 to work with your plan administrators and withdraw the extra money plus any interest that money earned.
The $500 will be included in your gross income for the year in which it was contributed to the 401k (which was 2016). The interest earned will be added to your taxable income for the year in which it was taken out–depending when you corrected the situation, this would either be 2016 or 2017.
It doesn’t matter how much you contribute over the limit. The same rules apply. It’s just that the more you overcontribute, the bigger your tax bill will be.
Because of the slow-moving nature of some 401(k) plans, it’s important to get your overcontribution correction in gear as soon as possible. It’s best if you initiate the withdrawal by March 1.
This means that you need to stay on top of your contributions for the previous year. Check them in January or February, just to ensure that you don’t miss any over-contributions.
Consequences After April 15
In many cases, individuals don’t notice that they’ve over-contributed to a 401(k) plan. So, what happens if you contribute too much but don’t notice it before April 15?
In this case, the excess contribution is effectively taxed twice. You’ll pay tax on the excess in the year it was contributed to the 401k (even though it wasn’t taken out). You’ll also pay tax on the amount once it is withdrawn from the retirement account. Here’s the explanation from the IRS:
Excess not withdrawn by April 15. If the employee does not take out the excess deferral by April 15, the excess, though taxable in the year of deferral, is not included in the employee’s cost basis in figuring the taxable amount of any eventual benefits or distributions under the plan. In effect, an excess deferral left in the plan is taxed twice, once when contributed and again when distributed. Also, if the entire deferral is allowed to stay in the plan, the plan may not be a qualified plan.
Double-taxation is never a good thing. Depending on how much you overcontributed, this could make for some hefty financial consequences.
How Much Should You Have in Your 401k During Your 20’s, 30’s, 40’s and 50’s?
In Your 20’s
It can be tough to save for retirement in your 20’s because most of us aren’t making a ton of money yet and we may have student loan and credit card debt.
If your student loan debt interest is high, you can refinance to a lower rate with Earnest. If your rate is already low, you can put paying this debt off on the back burner in favor of investing because the average you can earn in the market is higher than the interest on your loan.
Hustle to get the credit card debt paid down. But in the meantime, if you get matching, contribute the minimum you have to to get that. Because like we said, free money.
Saving for retirement in your 20’s can be easy because you don’t yet have a lot of obligations. Don’t fall victim to lifestyle inflation. If you make the right moves now, you will be well on the road to financial independence.
Ideally, you are saving 10% of your income for retirement. You can save that entire 10% in your 401k, or consider additional retirement investments like a Roth or Traditional IRA.
In Your 30’s
Your 30’s are often the best decade in which to save for retirement. Hopefully, your debt is paid off or at least manageable. You are making more money that you were in your 20’s, you may now be part of a two-income household which takes some pressure off even after you start a family or buy a home.
You aren’t panicking about how you’ll pay for college, and your parents don’t need any financial help. All of those things can change so in your 30’s you need to save, save, save!
It may not be realistic to max out your 401k at this point, $18,500 may be more than you can afford to put away but be sure to steadily increase your contribution each year.
If you are making enough to max out, consider opening an IRA as well. It’s another retirement savings account that you can open once you’ve reached the 401k max for the year. If you have or plan to have children, now is the time to start a 529 College Savings Account.
If you’re looking to buy a home, make sure your credit score is 760 or above. You want the best possible mortgage rate. If your score isn’t quite there, we can help you bump it up.
Make sure you have at least a 20% down payment so you can avoid the expense of PMI.
In Your 40’s
If you haven’t started saving for retirement, you have got to buckle down and catch up. You need to make some tough decisions. If you were planning to help your kids with college, forget it. They have a lot more time to pay off student loans than you have to save for retirement.
You need to bring in some additional income to kick-start your retirement savings. Start a side hustle, drive for Uber on weekends. If your partner has been a stay at home parent, the kids aren’t little anymore. They need to get a job and start contributing.
No more vacations and elaborate holiday celebrations. Every bit of extra money you can find needs to be going into your retirement accounts.
In Your 50’s
Age has its perks. If you’re 50 or older, you can bump up your 401k contributions from $18,500 a year to $24,500. Start doing that; you’re in the final stretch. You can bump up your IRA contributions too from $5,500 to $6,500.
Now is the time to start thinking about what you want your retirement to look like. Will you continue to work in some capacity? Will you live in the same area or move to a place with a lower cost of living? If you plan to stay, will you stay in your home or downsize now that you have or will soon have an empty nest?
If you still have a mortgage, you need to pay it off aggressively. You don’t want to retire with mortgage payments hanging over your head. If you have not yet created a passive income stream, now is the time. Rental property, REIT’s dividend stocks. You want to continue to generate some income after retirement.
Evaluate your health and that of your spouse. If you have health issues, it’s not too late to address them but too late is not far off. Based on your health, evaluate your insurance. Do you have enough and the right kinds?
In Your 60’s
At this point, you are hopefully pretty set to retire. If you have left saving until now, you’re going to have to keep working, probably until you physically can’t work anymore. There are some final steps you should take before you get that gold watch.
Now is the time to decide when to start collecting Social Security. The longer you wait, the more money you will get each month. AARP has a calculator that can help you decide when to claim. Start compiling a retirement budget.
You can’t afford as much risk in your asset allocation anymore, but if you’re in good health, you may have decades of life left so you can’t get too conservative either.
Tweak numbers based on other personal circumstances, but a good rule of thumb is to base your asset allocation based on your age. Subtract your age from 120 to get the right ratio. That means a 60-year-old should be allocated 60/40 stocks to bonds.
Should you Invest in 401(k)
But depending on your financial situation, putting $19,500, the maximum allowable amount in 2020 for savers under 50, into an employer-sponsored retirement account each year may not make sense. Rather, you may want to fund other accounts first. Here are three things to consider before maxing out your 401(k).
1. Non-retirement goals
While you’ll be grateful for what you save now once the time comes to retire, it’s important to think of the big picture: What other goals do you have between now and then?
Clients regularly ask whether they should max out a 401(k) — and sometimes they’re surprised by the answer, says Jeff Weber, a certified financial planner and wealth advisor at Titus Wealth Management.
“Most people think that putting extra money aside for retirement is the best policy,” he says. “But we like to take a look at the big picture and make sure they’re covered in other areas, too.”
As part of the decision process, Weber ticks through a checklist with clients:
- Do you have any high-interest credit card debt? If so, pay that off ASAP.
- Have you built up an emergency fund with three to six months of living expenses?
- Do you have adequate health insurance?
- If you’re married or have children, do you have adequate life insurance?
- Do you have adequate disability insurance in case you’re out of work for six months or more because of an injury or ailment?
- Do you have a basic will or trust established?
- If you’re close to retirement age, do you have long-term care insurance?
Generally, Weber wants his clients to have these goals in place before maxing out a retirement plan. But if they don’t, he still urges clients to contribute the minimum to get their employer’s match for a company-sponsored retirement plan, if it’s offered.
Even after the checklist is completed, clients may want to save for a down payment on a house or fund an IRA before maxing out a 401(k), Weber says. “It really depends on a client’s goals.”
2. Today vs. Tomorrow
Retirement planning is a balancing act of putting money aside for later, while keeping enough readily available to pay for stuff now or in the near future. Wait too long to start saving and you’ll have to play catch-up later. Save too much now and you may need to raid your retirement account (which often incurs a 10% tax penalty if you’re under the age of 59½).
The statistics on retirement savings can be depressing. A recent study by Ascensus, a retirement plan provider, found that about half of Americans are saving less than 5% of their income and only 35% of employees are on track to meet their retirement goals.
As a result, the knee-jerk reaction for many advisers is to encourage people to max out savings — and even max out a 401(k), says Rick Irace, chief operating officer at Ascensus. “But that’s not realistic for everyone.”
Irace says he was reminded of that recently when his daughter, who’s in the early stages of her career, asked for advice on contributing to her employer-sponsored plan.
“I knew she had other goals in mind and so she had to balance what she can put away for retirement while having enough money to pay rent, gas and everything else,” Irace says. The decision? His daughter is setting aside money in a rainy-day account and began funding her retirement by contributing the minimum amount to meet the company match.
The company-match perk, which is fairly common among firms that offer retirement plans, means your employer will match your contributions up to a certain percentage. While the amount varies, it’s free money for those who contribute to their plans.
3. Other investment options
OK, so you have all your financial ducks in order and are able to set aside that $19,500 (or $26,000 if you’re 50 or older). Is it time to max out? There are other options to consider. Deciding where to invest money beyond the amount required to meet your company’s match limit primarily comes down to one thing: fees.
If the fees in your employer-sponsored plan are high, direct additional money to a traditional or Roth IRA. The contribution limit is much lower — $6,000 a year or $7,000 for those 50 or older — so if you have spare money beyond that, funnel it back into the 401(k).
When choosing between the traditional and Roth variety of an IRA or 401(k), the difference comes down to when you’ll be taxed. In traditional accounts, contributions are pretax and distributions in retirement are taxed; with Roth accounts, contributions are made after taxes but retirement distributions are tax-free.
Another perk of both types of IRAs? These accounts typically have a broader assortment of investments, such as exchange-traded funds. If you’re in a place financially where you can max out a 401(k) and IRA without jeopardizing other goals, do it, Irace advises.
A 401(k) Calculator
A 401(k) can be one of your best tools for creating a secure retirement. It provides you with two important advantages. First, all contributions and earnings to your 401(k) are tax deferred. You only pay taxes on contributions and earnings when the money is withdrawn.
Second, many employers provide matching contributions to your 401(k) account which can range from 0% to 100% of your contributions. The combined result is a retirement savings plan you can not afford to pass up. Here is an example of a 401(k) calculator
Basics of 401(k) Allocation
When you allocate your 401(k), 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(k) that contain the mix of assets you want to hold in your portfolio (stocks and bonds, for example) in the percentages that meet your retirement goals and suit your tolerance for risk.
Easy 401(k) Allocation Approaches
There are many 401(k) allocation approaches you can take to achieve your investing aims without much effort—some more hands-off than others.
1. Use Target Date Funds to Retire on Your Terms
A target-date fund is a fund geared toward people who plan to retire at a certain time—the term “target date” means your targeted retirement year. These funds help you maintain diversification in your portfolio by spreading your 401(k) money across multiple asset classes, including large-company stocks, small-company stocks, emerging-markets stocks, real estate stocks, and bonds.
Target date funds make long-term investing easy. Decide the approximate year you expect to retire, then pick the fund with the date closest to your target retirement date.
For example, if you plan to retire at about age 60, and that will be around the year 2030, pick a target-date fund with the year “2030” in its name. Once you pick your target-date fund, it runs on auto-pilot, so there is nothing else you need to do but keep contributing to your 401(k).
The fund automatically chooses how much of which asset class you own. Over time, the fund rebalances itself—money automatically gets moved between asset classes in a way that supports your goal to retire by the target date.
The diversification and automatic rebalancing mean that a target-date fund can be the only fund in your 401(k) account. As you near the target date, the fund will progressively become more conservative, and you will own less stock and more bonds.
The goal of this 401(k) allocation approach is to reduce the risk you take as you near the date when you need to begin withdrawing from your 401(k) money.
2. Use Balanced Funds for a Middle-of-the-Road Allocation Approach
A balanced fund allocates your 401(k) contributions across both stocks and bonds, usually in a proportion of about 60% stocks and 40% bonds. The fund is said to be “balanced” because the more conservative bonds minimize the risk of the stocks.
This means that when the stock market is quickly rising, a balanced fund usually will not rise as quickly as a fund with a higher portion of stock. When the stock market is falling, expect that a balanced fund will not fall as far as funds with a higher portion of bonds.
If you don’t know when you might retire, and you want a solid approach that is not too conservative and not too aggressive, choosing a fund with “balanced” in its name is a good choice (Vanguard Balanced Index Fund Admiral Shares, for example).
This type of fund, like a target-date fund, does the work for you. You can put your entire 401(k) plan in a balanced fund, as it automatically maintains diversification and rebalances your money over time to maintain the original stock-bond mix).
3. Use Model Portfolios to Allocate Your 401(k) Like the Pros
Many 401(k) providers offer model portfolios that are based on a mathematically constructed asset allocation approach. The portfolios have names with terms like conservative, moderate, or aggressive growth in them. These portfolios are crafted by skilled investment advisors so that each model portfolio has the right mix of assets for its stated level of risk.
Most self-directed investors who aren’t using one of the above two best 401(k) allocation approaches or working with a financial advisor will be better served by putting their 401(k) money in a model portfolio than trying to pick from available 401(k) investments on a hunch.
Allocating your 401(k) money in a model portfolio tends to result in a more balanced portfolio and a more disciplined approach than most people can accomplish on their own.
4. Spread 401(k) Money Equally Across Available Options
Most 401(k) plans offer some version of the choices described above. If they don’t, a fourth way to allocate your 401(k) money is to spread it out equally across all available choices. This will often result in a well-balanced portfolio. For example, if your 401(k) offers 10 choices, put 10% of your money in each.
Or, pick one fund from each category, such as one fund from the large-cap category, one from the small-cap category, one from international stock, one from bonds, and one that is a money market or stable value fund. In this scenario, you’d put 20% of your 401(k) money in each fund.
This method works if there are a limited set of options, but requires much more time and research there are an array of options. In addition, it’s not as fail-safe as the first three because the asset mix may not be suitable for your retirement goals, and you have to rebalance the portfolio to maintain a certain percentage of each asset category over time.
5. Work With an Advisor for a Tailored 401(k) Allocation Strategy
In addition to the above options, you can opt to have a financial advisor recommend a portfolio that is tailored to your needs. The advisor may or may not recommend any of the above 401(k) allocation strategies. If they pick an alternate approach, they will usually attempt to pick funds for you in a way that coordinates with your goals, risk tolerance, and your current investments in other accounts.
If you are married and you each have investments in different accounts, an advisor can be of great help in coordinating your choices across your household. But the outcome won’t necessarily be better—and your nest egg won’t necessarily be bigger—than what you can achieve through the first four 401(k) allocation approaches.
Does 401(k) Count as Savings?
Your retirement account is not a savings account. Despite the fact that retirement accounts are designed for long-term goals, it is relatively easy to access your money in the form of 401(k) loans and 401(k) hardship withdrawals. Just because you have the ability to access money in your retirement account doesn’t mean you should.
Consider the following three pitfalls associated with treating your retirement account as a savings account.
Penalties and taxes. The IRS provides tax benefits to people who invest in retirement accounts, but the caveat is they will assess a 10 percent early withdrawal penalty if you withdraw your funds before you are eligible. In some cases you may have to pay taxes immediately upon withdrawal. If you plan on tapping your retirement account for reasons other than retirement, carefully consider how much it will cost you in taxes and penalties.
Unprotected funds. Retirement accounts are exempt from most debt collection efforts. The majority of people who borrow from their retirement account do so as a result of a financial hardship or immediate need for cash. But once you remove money from your retirement account, your money becomes vulnerable to debt collection efforts.
Loss of growth opportunity. When you take money out of a retirement account, you immediately lose any growth opportunity for the amount you withdraw. Over time, this can end up costing you tens of thousands of dollars.
As a general rule, retirement accounts should remain untouched whenever possible. There are few situations where the benefits of borrowing from a retirement account outweigh the drawbacks.
To avoid this situation, make it a point to include short-term savings in your household budget. Your short-term savings will always be available for emergencies and won’t hurt your long-term savings and retirement goals.
What is the Average Retirement Nest Egg?
According to this survey by the Transamerica Center for Retirement Studies, the median retirement savings by age in the U.S. is:
- Americans in their 20s: $16,000
- Americans in their 30s: $45,000
- Americans in their 40s: $63,000
- Americans in their 50s: $117,000
- Americans in their 60s: $172,000
Suggested Retirement Savings by Age
The above savings amounts may seem impressive, but consider this “rule of thumb” given by some financial experts on how much individuals should be saving in their retirement accounts for a goal of retiring by age 67:
- Americans in their 30s: 1–2 times their annual salary
- Americans in their 40s: 3–4 times their annual salary
- Americans in their 50s: 6–7 times their annual salary
- Americans in their 60s: 8–10 times their annual salary
That means, for example, that a 35-year-old making $45,000 a year should have up to $90,000 in their retirement accounts—twice what most Americans have saved.
How Much Money Will You Need to Retire?
Some experts will cite the “80 percent rule” of retirement planning, which states that you should plan to live on 80 percent of your pre-retirement income.
Your personal goals—retiring early, owning a second home, leaving a nest egg for your heirs or accommodating health challenges—could mean that your needs require different planning. The unpredictability of economic factors, medical costs and your longevity will also affect your expenses in retirement.
Many financial advisors suggest saving 10–15% of your gross income starting in your 20s. That’s in addition to money set aside for short-term goals such as a new car or emergencies
Can You Make a Lump Sum Contribution to Your 401(k)
Lump-sum contributions are usually allowed by employer plans and usually must come from another qualified account or qualified employer plan. For example, a rollover from an existing IRA, Roth, 401(k), 403(b), 457, Simple, SEP and more may be accepted into the current employer plan.
Making a lump-sum contribution could therefore take two steps – moving money to the 401(k) from an IRA of similar plan, and then putting fresh money into the IRA.
Remember, though, that the IRA replacement must be within the annual limits, which apply to all your IRAs, not each one separately. To avoid tax and penalty, don’t route the funds through your bank account, but have them sent directly from one retirement account to another.
For many investors who have skimped on their contributions during the year, the only real option this late is to do better next year by ordering a larger payroll deduction.
If you can afford it, you can make large contributions at the start of the year to get ahead of the game, leaving room to cut back if money is tight later. Check first with your employer on how often you can change the amount.
Managing Your 401(k) in a Recession
Pay attention to asset allocation
When the stock market becomes more volatile, investors may have thoughts like, “Should I move my 401(k) to bonds?” This could offer a sense of security in the near term, but it’s important to avoid becoming shortsighted. Richter says it’s better to ensure that a retirement portfolio is invested in a way that doesn’t necessitate sudden changes if a slowdown occurs.
“A plan participant should avoid the temptation to attempt to time the market,” he says. Those closer to retirement should be focused on minimizing volatility, while younger workers can look for opportunities to grow their portfolios. “The investors who have allocated properly should be able to ride out the waves of a recession without losing sleep,” Richter says.
Maintain the pace on contributions
How much to put in a 401(k) during a recession is something workers may struggle with if they’re concerned about a declining stock market. Charlotte Geletka, managing partner at Silver Penny Financial, says investors shouldn’t be put off by gloom-and-doom financial headlines. “When the stock market is down is the best time to invest in your 401(k),” she says.
That’s because elective salary deferrals can stretch further when stock prices drop. Re-evaluating current contribution rates and potentially increasing that rate are strategic moves to consider when the economy seems to be in a slump. Sticking to a long-term retirement investment approach that includes consistent contributions can help balance out down periods over time.
Don’t jump the gun on withdrawals
Continuing to invest in a tax-advantaged plan during a slump may seem like a gamble, and for some workers it may be tempting to cash out early to avoid potential losses. The better move is keeping a downturn in perspective and understanding how market cycles operate.
“In most cases, if there is a recession, you will see your account value go down due to market volatility,” says David Blackston, founder of Blackston Financial Advisory Group.
Those younger than age 55 who aren’t planning to retire in the next 10 years shouldn’t allow themselves to be prompted into cashing out of their plan, he says. Instead, investors should concentrate on reducing the amount of risk they’re exposed to and remember that time is on their side.
Look at the big picture
A 401(k) may be the centerpiece of a retirement planning strategy, but there are other things to factor in as well when the economy begins to wobble.
Taking a comprehensive view of assets held in workplace plans, individual retirement accounts and taxable accounts, as well as looking to other potential income sources such as Social Security or annuities, can help keep economic fears at bay. Chart your course, then stay the course, says Monika Hubbard, institutional retirement consultant at Unified Trust Company.
She suggests meeting with a retirement plan advisor to better gauge income needs and how to go about meeting those needs, regardless of economic shifts. “Remain invested and diversified, don’t look at your account balance and don’t panic,” Hubbard says.
Avoid taking a loan from your plan
Loans can be just as detrimental as withdrawals when the economy begins to lose steam. “Investors should be especially careful about taking 401(k) loans in a contracting economic environment where their job might be at risk,” says Chad Parks, founder and CEO of Ubiquity Retirement + Savings. “If you don’t have the money to repay the loan, you could be at risk for a huge tax liability and a penalty charge, just when you can least afford it.”
Loans can also be problematic if the plan bars workers from making new contributions while the balance is outstanding. The value of existing assets in the plan may shrink and savers aren’t able to offset that with new investments.
What Happens to Your 401(k) When You Quit You Job?
Since your 401(k) is tied to your employer, when you quit your job, you won’t be able to contribute to it anymore. But the money already in the account is still yours, and it can usually just stay put in that account for as long as you want — with a couple of exceptions.
First, if you contributed less than $5,000 to your 401(k) while you were with that employer, they’re legally allowed to tell you, “Your money doesn’t have to go home, but you can’t keep it here.” (It costs them money to maintain your account, after all).
If you contributed less than $1,000, they might just mail you a check for that amount — in which case you should deposit it into another retirement account ASAP so that you don’t get hit with a penalty from the IRS (more on that below). If you contributed between $1,000 and $5,000, your employer might move your money into an IRA, which is called an involuntary cashout.
Also, if you had a 401(k) match, then you only get to keep all of that money if the contributions had fully vested before you left. If not, your employer would get to take back any unvested contributions. (Of course, any money you put in yourself is always 100% yours.)
At what Age Does RMD Stop
It’s important to remember that taking out an RMD is up to the account holder. While the IRA provider may send a notice, the IRS will not contact you to state how much should be taken out.
The deadline to take an RMD is December 31st of every year, except for your very first RMD, which can be taken until April 1st of the calendar year after you turn 70 ½. But remember if you do that, you will be taking two RMDs in the same year.
How to Borrow from Your 401(k)
You can borrow from your 401(k) only if your plan document allows you to borrow for the specific reason you have in mind. Some 401(k) plans permit borrowing for any reason, but most permit loans only for certain specified reasons.
To borrow from your 401(k)
- Get details about your particular account loans. Check out your summary plan description, or talk to your benefits office or 401(k) plan provider.
- Figure out how much you can borrow. The government sets the limits on how much you can borrow. Generally, you’re allowed to borrow no more than 50 percent of your account value up to $50,000 maximum. However, government rules theoretically permit borrowing 100 percent of an account up to $10,000. But most plans don’t allow this; they limit all loans to 50 percent of the account value for the sake of simplicity. Some plans also impose a minimum loan amount because administering a loan for only a few bucks isn’t worth the hassle.
- Determine how much interest you have to pay. The interest you pay on your 401(k) loan is determined by your employer and must be a level that meets IRS requirements. It’s usually the prime rate (the interest rate banks charge the most creditworthy companies) plus 1 or 2 percentage points. In most plans, the interest you pay goes back into your account, so you’re in the interesting position of being both the borrower and the lender.
- Find out the repayment period. You normally have to repay the loan within five years, but you can repay it faster if your plan permits. Your employer may permit a longer repayment period if you use the money for a home purchase.
- Ask about repayment methods. Employers usually require you to repay a loan through deductions from your paycheck. The loan repayments are taken out of your paycheck after taxes, not pre-tax like your original contributions. Then, when you eventually withdraw this money in retirement, you pay tax on it again.
401k Organisations
Fidelity Investments is a powerhouse in retirement planning. Investors put more into Fidelity 401(k)s than Japan’s $5.4 trillion gross domestic product. Although stock funds are usually your best bet for high returns, investing entirely in stock may not be the best retirement strategy, so keep an eye on risk as you evaluate these Fidelity retirement funds.
What follows are 10 of the best Fidelity funds for retirement that are available inside and outside of Fidelity 401(k)s, based on their 10-year performance as of Dec. 31. (Note: It is up to your company which funds are available in your 401(k). You may or may not have access to these in your company plan. If you do, you’ll probably see the K-class version inside your 401(k).
The Vanguard Group, Inc. provides investment management and advisory services. The Company offers its services to equity investment and fixed income group, investment pooled vehicles, mutual funds, and separate account institutional clients. The Vanguard Group serves customers worldwide.
Empower Retirement’s main mission is helping customers grow their investments to a level that can support them in retirement years. Empower offers their services both to the public and private sector.
They provide retirement plans for companies of every size as well as various government agencies from the municipality level all the way up. The employees of their direct customers are ultimately the users of Empower’s service. They also offer the opportunity to set up individual IRA accounts apart from their corporate plans.
The Transamerica Corporation is an American holding company for various life insurance companies and investment firms operating primarily in the United States, offering life and supplemental health insurance, investments, and retirement services.
The company has major offices located in Baltimore, Maryland; Cedar Rapids, Iowa; Denver, Colorado; Exton, Pennsylvania; Harrison, New York; Johns Creek, Georgia; Plano, Texas; and St. Petersburg, Florida. Additional affiliated offices are located throughout the United States. In 1999, it became a subsidiary of Aegon, a European financial services company headquartered in The Hague, Netherlands.
United States Department of Labour
The United States Department of Labor (DOL) is a cabinet-level department of the U.S. federal government responsible for occupational safety, wage and hour standards, unemployment insurance benefits, reemployment services, and some economic statistics; many U.S. states also have such departments. The department is headed by the U.S. Secretary of Labor.
Employee Benefits Security Administration
The Employee Benefits Security Administration (EBSA) oversees and enforces provisions of the Employee Retirement Income Security Act of 1974 (ERISA).
As an agency of the Department of Labor (DOL), EBSA is charged with enforcing the rules governing the conduct of plan managers, the investment of plan assets, the reporting and disclosure of plan information, the fiduciary provisions of the law, and workers’ benefit rights.
Simply put, the Employee Benefits Security Administration acts as a watchdog against the inappropriate activities of pension managers.
BrightScope is a financial information and technology company that brings transparency to opaque markets. BrightScope data drives better decision-making for individual investors, corporate plan sponsors, asset managers, broker-dealers, and financial advisors.
BrightScope is also the leading independent provider of retirement plan ratings and investment analytics to participants, plan sponsors, asset managers, and advisors in all 50 states.
American Funds is one of the largest mutual fund companies in the world. Their funds are offered through brokers and can be found in many 401(k) plans in the U.S.
Capital Group operates around the globe with 7,500 employees in offices in multiple locations, including North America, Europe, Asia, and Australia. Investors primarily buy American Funds mutual funds through brokerage firms, some online discount brokers, or 401(k) plans.
Founded in 1931, American Funds is a division of Capital Group and is the third largest mutual fund company in the world with over $1.7 trillion in assets under management.
American Funds should appeal to investors wanting to purchase high-quality mutual funds from brokers. This mutual fund company may be a good fit for investors who want:
- Advice from brokers
- The potential for above-average long-term returns from mutual funds
- Actively-managed mutual funds that charge loads in exchange for advice
- High-quality mutual funds for long-term savings vehicles, such as 401(k) plans or IRAs
Ascensus, LLC provides record keeping and administrative retirement plan solutions. The Company offers outsourcing and product distribution, marketing and sales support, employee education, investment, trust, and custody. Ascensus serves institutional partners, third party administrators, financial advisors, plan sponsors, and participants in the United States.
Pentegra Defined Benefit Plan For Financial Institutions operates as a investment asset management. The Company offers solutions to qualified and non-qualified plan, benefits financing, investment, trustee, and consulting solutions.
T. Rowe Price Group, Inc. is an American publicly owned global investment management firm that offers funds, advisory services, account management, and retirement plans and services for individuals, institutions, and financial intermediaries.
The firm, with assets under management of more than $1.3 trillion at the end of 2019, is headquartered at 100 East Pratt Street in Baltimore, Maryland, and its 16 international offices serve clients in 47 countries around the world.
Human Interest Inc. provides internet based services. The Company offers online help to small businesses to set up a 401k with automated administration and built-in investment advising services. Human Interest serves customers in the United States.
Employee Benefits Research Institute
Employee Benefit Research Institute (EBRI) is a nonpartisan, nonprofit research institute based in Washington, DC, that produces original research on health, savings, retirement, and economic security issues, including 401(k) and retirement plan coverage data, post-retirement income adequacy, health coverage and the uninsured, and economic security of the elderly.
EBRI maintains the largest 401(k) microdatabase in the nation that tracks individual 401(k) participant investment activity.
Where will you be retiring?
Wherever you want to live during retirement will help determine what kind of a financial will impact on your accounts. There are other things that will impact this.
If you are planning on retiring to a state that is more expensive to live in then you already know your cost of living will go up because the good you purchase from day to day will go up such as if you plan to retire in Hawaii which has one of the highest costs of living in the United States.
Making sure there is enough money in your 401(k) will be of top priority if this is the case. Larger cities such as New York City will also have a higher cost of living though the more remote a place is, the lower it will be such Montana. You will not need to save as much to live there.
Whether you are planning on retiring to Hawaii or Montana, you need to keep in mind that each place will have its own taxes and tax code. Before you make the planned jump into retirement into any state, you should research the tax code so you know what the policies are and so you can do the most for your 401(k).
A Comfortable Retirement
How much to have in 401(k) ultimately depends on the level of comfort you want to achieve. If you want to continue living in your own home and traveling around the world first class, then having more money in your 401(k) account is a better thing because while expenses tend to decline as people age as there is less they need to buy to keep their lives going, medical expenses do go up.
It was found that people 75 years old and older had household expenses drop by 19% with them dropping by 34% by the age of 85. People around the age of 40 spent 40-45% of their budget on their home and other related expenses; which means by the time most people retire, their expenses will have dropped between 20 and 40 percent. This makes it extremely difficult to figure out how much we will need for our retirements.
If your goal is to retire and live on $80,000 a year after making an income o f$100,000 or more a year then you will need you 401(k) to grow by 8% each year to keep it in track with your goals.
Having only half your income saved from your salary does not mean you only have ½ of your original income to live on. Often a lot of our money is tied up into other kinds of interests such as a home. If the home is debt free then the home is an asset that can be used later as a source of income especially if all that is left to pay on is the property taxes.
Retiring
The projected date of your retirement is another factor in whether you will have enough in your 401(k) to retire. Many people are working longer into their golden years, retiring sometime after age 70.
Many are doing so because they choose to do so. Others are still working because their savings are insufficient or other life factors keep them working such as having to raise a grandchild.
Modern medicine is also keeping people active and living longer. Staying active can mean you will live to see age 90 which means if you retire at age 65 you will have another 25 years to plan for whatever life you choose to live.
Planning when to retire is not something many people figure out until they are well into their middle years. There are those people who work hard for the first 20 years of their working life so they can retire really early. If your job is low-stress, working extra years should not be a problem, but a higher stress job cannot only force an early retirement but encourage it.
Either way, you should know you will be surviving off the income you were able and willing to save early in your life and to do it well, you should adjust your savings to match what you want at retirement once you figure out when that will be.
Final Thoughts
It’s important to start saving for your retirement early in your life. This means not only having your 401(k) ready for you when you do retire, but other accounts that can help you increase security later is life.
Make sure if you are contributing to a 401(k) that you are maxing it out each year so you will be taking advantage of the maximum matching contribution made by your employer. You should also consider when you would like to retire because that will be a large factor in how much money you will need to save to be comfortable.
Tips:
- A financial advisor can do a lot to bring your budget in life and help you plan for your retirement if you are having trouble figuring things out. They can also advise you how to best place your money for maximum growth potential.
- You will also have your social security to help you in your retirement, but do not plan on it as the only thing to live on as it is not much. It is meant to supplement your savings.
