Retirement readiness in an advent calendar!
Day 10 – Schedule Annual Advisor Meetings. Plan Sponsors, include your TPA!
You made it! If you’ve kept up with the nine previous days of tips, you’re well on your way to a holly, jolly Retirement! Now let’s pull it all together with one final tip to help you avoid Scrooge status.
Make time each year to meet with your financial advisor. Plan Sponsors, make sure to evaluate your plan annually with both your advisor and your TPA. If you follow through with the other tips in this list, you’ll be well prepared to properly review your 401(k) plan and retirement account to ensure a solid performance next year.
Say goodbye to your retirement stress now and enjoy your holidays!
Don’t forget, call or email the retirement plan experts at TriStar for all your retirement questions or needs! Merry Christmas and happy holidays to all, and to all a cheery retirement!
If I asked you what you’re paying in 401(k) plan fees, or what your participants are paying, could you give me an educated guess without searching the internet for what 401(k) plan fees are, or how to estimate your costs? If not, don’t worry. You’re not alone. Fees are a complicated issue and are not always easy to calculate.
There are three broad categories of 401(k) fees: Plan Administration Fees, Individual Transactional Based Service Fees and Investment Fees.
Plan Administration Fees pay the service providers you partner with to assist you in keeping your plan in compliance, provide record keeping for your participant accounts, possibly provide a website for your participants, produce participant statements, and many other things. Depending on the vendors and service providers you partner with to help you administer your plan, you may also have access to knowledgeable customer service representatives and education on retirement planning. These fees can be paid directly by a plan sponsor or by plan assets.
Individual services fees are generally charged to participants who take advantage of particular, optional plan features, such as participants who take loans from the 401(k) plan.
The most difficult fees to determine are those paid to manage the plan investments. Since these fees are almost always paid by the plan from plan assets via the participant accounts, the fiduciaries (plan sponsors and trustees etc…) have an obligation to not only understand these fees but also to monitor them closely.
For more information on the types of fees associated with investment choices in a 401(k) plan, please review the DOL’s guide to 401(k) plan fees.
For information on the fees your plan is paying, contact the service providers you have partnered with, review your plan’s fee disclosure document and the annual participant level fee disclosure. Meet with your service providers regularly (at least annually) to review the plan, the investments and their fees and returns.
If you still don’t know where to turn, or what to look for, call TriStar. We would be happy to help you.
Day 8 – Avoid Loans
Some employer-sponsored retirement plans allow participants to borrow against the vested amount in their 401(k) account. According to a study done by KRC Research, more than one-third of Americans take a loan from their retirement savings plans.
While 401(k) loans provide some shelter from the high-interest rates of bank loans or credit cards, usually more damage is done and more money lost than saved in the long run. When you take a loan from your 401(k), you are borrowing that money from yourself and your future. There are a number of drawbacks to borrowing from your 401(k).
- Keep in mind that this money is set aside specifically for your retirement. If you begin borrowing money from that fund before you’ve reached retirement age, you may find it hard to stay on track for retirement preparedness down the road. Depending on your age, you may not leave yourself much time to rebuild your savings.
- There are fees involved with taking a loan, which automatically decrease the funds in your retirement account even before you receive your loan.
- The money you take out of your 401(k) for a loan is no longer growing and compounding earnings in your account. According to an article by Fidelity, the “interest paid on a plan loan is often less than the rate the plan funds would have otherwise earned.”
- In the same article, it’s stated that 24 percent of participants actually decrease their deferral rates after taking a loan (with another nine percent discontinuing contributions completely). This can result in a much smaller return, especially when considering the amount of growth possible at a higher deferral rate over a number of decades and possible losses of employer matching contributions due to lower deferral rates.
- Another item to keep in mind is the status of your job. If you take a loan from your 401(k), then lose or quit your job with the sponsoring employer, you may be required to repay your loan within 60 days of termination. If you are unable to repay your loan within the allotted time frame, you will default on your loan and it will become a taxable distribution. This can have costly ramifications, such as an early withdrawal penalty depending on your age, and additional taxes.
Keep your retirement savings for your retirement and keep it growing and compounding. Don’t borrow against your future!
Day 7 – Meet the Employer Match, and Then Some!
When considering what percentage of your salary to contribute to the 401(k) plan, don’t miss out on the employer match! It’s a common mistake plan participants make. Many employers offer to match employees’ salary deferrals as an added benefit. Essentially, if you agree to make contributions for yourself the employer will match those contributions up to certain limits. The amount of the matching contribution you receive directly correlates to your gross income and your contribution percentage. We recommend confirming whether or not your employer offers a match, and if they do, the type of match or the formula for the match your employer offers. Some employers offer a dollar-for-dollar match up to a certain percentage of compensation while some offer less such as a fifty cent match for every dollar. No matter the amount of the match, take advantage of this added perk! Don’t miss out – at least defer enough to maximize your match.
If you don’t contribute enough to receive your full match, you’re basically saying “no free money for me, please.”
Day 6 – Consider Roth Contributions
What’s a Roth Contribution? Roth contributions, or Roth salary deferrals, are taxed at the time of contribution into the 401(k) plan, rather than taxed at the time of distribution or withdrawal. If you choose to use Roth salary deferrals, you will pay state and federal withholding on the deferrals at the time they are withheld from your pay. They will grow tax free until your retire. Once you retire and begin taking distributions, you will not pay taxes on the accumulated earnings.
What does this mean for you? Roth deferrals are undoubtedly beneficial, especially for younger participants who are just starting their careers. Roth deferrals can help protect retirement assets from potential future increases in tax rates. In the future, as your earnings grow, so will your tax rates. Therefore, paying taxes on your deferrals now and allowing those contributions to accumulate earnings on a tax-free basis could reduce your taxes in the future.
Day 5 – Set a Budget, Pre & Post-Retirement
Early Years – Big Picture
If you’re still far from retirement, use the goal list you made on day one to create a rough budget. Teaching yourself to stick to a budget now will make it easier when you’re working with a limited income.
10 Year Prior to Retirement – Dial it in
Remember the budget spreadsheet I mentioned on Day 2? That spreadsheet will help you track your expenses into retirement. Calculate the percentage of your current income you’ll need to live on based on your current expenses, and compare it to your current savings rate. Also, take a look at the number you came up with when you calculated your retirement needs on Day 3. If your expenses overwhelm your current retirement savings trajectory, it’s time to restructure your savings plan.
Keep in mind, one major expense many forget to take into consideration is health care. Health care costs may be minimal early on, but as you age, those expenses tend to spike. A Forbes article cited a study done by the Employee Benefit Research Institute, which found the need for costly services like overnight stays in the hospital increase by 27 percent from ages 65 to 74.
Day 4 – Find Your Financial Advisor. Plan Sponsors, Seek Out a TPA, Too.
If you’ve got retirement on the brain, and you should, it’s time to find a Financial Advisor best suited to your needs. For your first meeting, you’re already well prepared if you’ve followed our three previous tips. A good financial advisor will ask some preliminary questions to gauge your wants and needs. One major topic of discussion in this meeting should be your goals for retirement. Other basics your advisor will ask about:
- Current Savings
Plans Sponsors, finding a Financial Advisor and TPA to help you with a plan start up and administration is just as important. While your Financial Advisor will help with selecting the investments to offer your plan participants, your TPA will work with you to design a plan that best suits your needs, act as your administrator and record keeper, handle annual compliance for your plan and continue to provide consulting services throughout the year. Contact us if you have questions about TPA services, and what TriStar brings to the table.
Day 3 – Calculate Your Retirement Needs
Calculating your retirement savings needs is a difficult task. It’s nearly impossible to estimate not only your exact expenses but also unknowns like health care needs or emergencies.
However, there are several useful retirement calculators that take the basics into account, and some take a more thorough approach. Most leading retirement plan vendors offer a variety of tools to help participants calculate their savings needs. If you’re participating in a 401(k) plan, your service provider most likely has a calculator accessible on the participant website. Otherwise, a quick search on calculating retirement provides several options. Find your favorite! More importantly, start now. Don’t wait. Use the tools available to help you estimate your retirement savings needs and set your savings goals. Then, begin working towards meeting those goals.
Day 2: Review Your Spending
To build a complete picture of spending in your retirement years, taking your current spending habits into consideration is a great start. While these may change over the years, look at this review as if you’re retiring tomorrow – what expenses should you be prepared to cover with your savings? Certain expenses remain static while some vary. You will most likely always pay utility and insurance bills. However, luxury or extraneous purchases may change. Your Netflix or Spotify subscription may not exist once you reach retirement age. For now, focus on the priorities you’ll need to cover.
Creating and keeping a monthly budget spreadsheet, which includes your income, bills, transportation, grocery, health, savings and extraneous spending will help you now and down the road as you track your spending and calculate your savings.
Day 1: Lay Out Your Goals
When you picture your retirement, what does it look like? Are you debt free? Do you foresee any major purchases? Will you pass down an inheritance? What about travel?
Painting a picture of your overall goal helps to shape the road you’ll take to retirement readiness. Major life changes, such as a large purchases or travel, can heavily impact your retirement savings if you’re not planning for it. Start with a simple list of goals. You won’t need a detailed plan in place just yet, as long as your overall goals are laid out. Here are a few examples:
- Mortgage, cars, college debt is paid off.
- New vehicle.
- Home improvements.
- Travel bucket list: Tokyo, Venice,
If you’re a soon-to-be plan sponsor, lay out the goals you have for yourself and your participants. Is the goal of sponsoring a 401(k) plan to attract top talent to your company? Perhaps you want to increase employee retention. Maybe you’re focused on helping your employees retire comfortably. Or, you’ve heard about the tax benefits of sponsoring a 401(k) plan. These are all options to review before starting or amending a 401(k) plan.