If you're like many Americans, a 401(k) workplace savings plan will be a crucial part of your retirement security. That's why you need to do everything you can to protect and grow your 401(k). These strategies will keep you on track.
Opt for cheap
All funds that are in 401(k)s charge an annual fee, yet many people choose investments without focusing on that. Big mistake. Paying even 1 extra percentage point in annual fees could cost you $64,000 over 35 years on an initial $25,000 investment, according to federal studies. Look for options with annual fees below 1 percent, and consider sticking to passive index funds that mirror an index, rather than actively managed ones that try to beat the market, says Alicia Munnell, director of the Center for Retirement Research at Boston College.
"There's no evidence that paying high costs gets you a better product," Munnell says. She likes low-cost funds that regularly rebalance your investments to your expected retirement date.
Keep your hands off
It can be tempting to cash out your 401(k) when you leave a job or to borrow from it if you're strapped for cash. You also might be inclined to withdraw the funds as soon as the early withdrawal penalty disappears at age 59-1/2. Don't do it! Even without penalties, income taxes can eat up a big chunk of the withdrawals, plus you lose future tax-deferred compounding.
Be skeptical of rollovers
If you leave your job, you'll likely hear from brokers urging you to roll your 401(k) balance into their IRAs. Sometimes the switch makes sense, but you may be giving up some good investment options: low-cost institutional funds (Vanguard Total Stock Market Institutional shares, for example, have an expense ratio of just 0.04 percent). What you get in IRAs are typically higher-cost retail options: The average broad-market stock fund has an expense ratio of over 1 percent. "Your job is to ask a lot of questions and not be afraid to say no," says Stephany Kirkpatrick, a certified financial planner at LearnVest Inc.
Gather up your orphans
If you've had several jobs, you may have 401(k)s in a bunch of places. Now's the time to gather them together. There's no central database to help you track accounts, and your old employers may not be able to find you after a few address changes. Plus, it's easier to monitor and rebalance your investments if they're all in one place, Kirkpatrick says. The easiest course may be to roll those old balances into your new plan, if your employer allows it. Otherwise, establish a low-cost IRA.
Take maximum advantage
Contributing enough to get your full company match is a no-brainer, but most people need to chip in even more if they want a comfortable retirement. If possible, max out your 401(k) contribution (which is $24,000 a year for folks 50 and over). If you expect to be in the same tax bracket or a higher one, you could put some money into a Roth IRA or Roth 401(k) (where earnings are taken out tax-free in the future). But most people will retire into a lower tax bracket, so taking the tax deduction now may make the most sense.
Be an advocate for change
Employers have a fiduciary duty to keep 401(k) fees reasonable. If yours offers only high-cost options, speak up for better, low-cost choices.
Social Security Tips
Two-thirds of Americans over age 65 rely on Social Security for at least half their monthly income. You'll get the most out of your benefit if you:
- Wait. Over 40 percent of people claim at age 62, settling for a payout at least 25 percent less than if they waited until full retirement age.
- Delay claiming. Wait if you can. Between ages 66 and 70, your benefit increases by 8 percent each year you wait.
- Sign up online. Create your own account at socialsecurity.gov/my account and make sure your earnings history is correct, as it helps determine your monthly benefit.
- Do the math. Free online calculators from AARP and the Social Security Administration can help you estimate your future income.
- Don't forget survivor/spousal benefits. If your spouse or former spouse was the higher earner, you might be able to claim on their earnings record as your benefit grows.
Taxes in Retirement
Not all taxes end when you stop working. Here are a few big ones to keep in mind.
- Pensions: Most company pensions are fully taxable. There are exceptions, though, so you may want to consult with a tax professional.
- Social Security: In some cases, payments are federally taxable (and up to 85 percent of the benefit can be taxed, depending on your income and marital status). Some good news: Thirty-seven states and the District of Columbia don't tax Social Security income.
- State income tax: Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming don't tax ordinary income.
- RMDs: If you are 70-1/2 years old, you'll need to start taking annual required minimum distributions from your retirement accounts such as traditional IRAs, SEP and SIMPLE IRAs, and 401(k), 403(b), 457(b) and profit sharing plans. If too much comes out it could bump up your tax bracket. On the other hand, Roth IRA distributions, starting at age 59-1/2, are tax-free.
- Early withdrawals: Taking money out of your IRA or 401(k) before age 59-1/2 creates a tax bill for you as well as a 10 percent penalty, in most cases.
Also of Interest
- A bigger payday from your 401(k)
- Social Security and survivor benefits
- Find great volunteer opportunities in your community
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