New 401k Limits Coming in 2013
October 23, 2012 – posted by Cody Wickham
Ushering in the New Year with increased contribution limits to employer-sponsored retirement plans will be a welcomed improvement to the retirement plan system. The tax-free contribution limit for 2013 will increase to $17,500, up from $17,000 in 2012, the Internal Revenue Service (IRS) announced Thursday. This is the second consecutive year the IRS has boosted the contribution limit due to raising inflation. The inflation rate refers to a general rise in prices measured against a standard level of purchasing power. The most well known measures of Inflation are the Consumer Price Index (CPI) which measures consumer prices, and the Gross Domestic Product (GDP) deflator, which measures inflation in the whole of the domestic economy. The most recent inflation data shows a rising trend since May 2012, with it capping off at 2.0% for the month of September. However, the catch-up contribution limit, which is the additional amount of tax-free money employees over 50 can contribute to their retirement plans, remains unchanged at $5,500.
The IRS said it will also increase more than two dozen tax benefits as well, which include tax-free gifts and foreign earnings. Taxpayers will now be able to gift as much as $14,000 tax-free, up from $13,000 and the amount of foreign earnings that can be excluded from taxable income will rise from $95,100 to $97,600.
ETFs to Invade 401ks
August 21, 2012 – posted by Cody Wickham
Industry-wide speculation as to whether Exchange-Traded Funds (ETFs) will help or harm plan participants has been at the heart of many mutual fund and ETF providers. Major lobbying efforts are underway on behalf of exchange-traded fund providers, pushing for inroads into the more than $5 trillion retirement savings industry. Nicholas Colas, chief market strategist at ConvergEx Group, said “Retirement assets in self-directed programs are the last great bastions of the mutual fund world; since most firms that provide bookkeeping for these plans built their systems around these invest products.”
Plan providers are hesitant to offer a myriad of ETFs on fears that these products may be too sophisticated and perhaps too risky for the average investor. However, ETFs provide a wider array of options along with substantially lower fees when compared to actively managed mutual funds. Another piece to the puzzle that might be hindering the entrance of ETFs into 401ks is plan providers have not figured out how to get their slice of the commission cake. Regardless, regulators need to figure out which ETFs are “safe” for the average investor and implement them into retirement plans.
401k Loan Defaults
July 24, 2012 – posted by Cody Wickham
401k loan defaults are becoming circadian in the United States, draining over thirty-seven billion a year from employer-sponsored retirement accounts according to a study conducted by Robert Litan, a researcher at the Brookings Institution. Before the recession of 2008, the recorded rate for 401k loan defaults was 9.7%. Currently we are at 17.4%, which is actually down from its peak two years ago of 19.8%. These loans are being taken out to pay for emergency expenses, pay off debt, or cover day-to-day cost, often because the borrowers are unable to qualify for traditional forms of credit.
Just about all 401k plans allow participants to take out loans. According to the Investment Company Institute, about 18.5% of participants had loans against their retirement account in 2011, up from 15% in 2006. Due to the economic downturn, many participants are unable to pay back their loans, often because of a job loss. You see 401k loan default rates tend to be directly correlated with the U.S. unemployment rate, which is currently 8.2%. Bills don’t wait, so when the paychecks stop coming, people turn to their nest egg for monetary support and end up defaulting on their loan. Once you’ve defaulted, the loan amount is deducted from your account balance, and you are charged income tax on that amount. On top of that, if the default arises due to job loss, you are charged a 10% penalty on the total amount of the loan.
Researchers are recommending changes to the current rules so that participants borrowing are automatically enrolled in an insurance plan with an option to opt out. This will protect participants from losses incurred if they happen to default on a 401k loan due to job loss. Before you decide to take a loan out against your retirement account, speak with a Certified Financial Planner to discuss other available options.
Funding Your Future: Are You Prepared?
April 16, 2012 – posted by Cody Wickham
A 2011 Gallup Poll shows that the biggest financial concern for Americans is not having enough savings to retire, which moved ahead of medical bills and mortgage payment. More than two-thirds of Americans do not have enough money saved away and will most likely outlive their assets if drastic changes are not made. For some, drastic changes will help; for others, it’s simply too late and the changes will not have enough time to develop and prosper into a substantial retirement account.
With all the education that’s available you would think the percentage of Americans who are at risk of not being able to maintain their standard of living after they retire would be gradually decreasing, but it’s not. In fact, according to The Center for Retirement Research at Boston College, 31 percent of working-age households were at risk in 1983, but in 2009 it had risen to 51 percent. Whether its not contributing enough, withdrawing funds early for a financial crisis, or simply forgetting to enroll in a program has created a massive gap between what people need to retire and what people have to retire.
Industry-wide changes have been pushing employees to contribute a greater percentage of their salary by introducing automatic enrollment and automatic contribution percentage increases. The automation of these processes will help employees contribute a greater amount to their employer-sponsored retirement plan and also relieve some of the responsibility from the employee. Today about 50 percent of companies offer automatic enrollment; of those, 40 percent offer automatic increases in percentage contributed. Companies’ nationwide need to offer automatic enrollment and contribution percentage increases because clearly most participants are not saving enough to support their lifestyles after retirement. Unfortunately some of us who are ill prepared for retirement have but one choice: work longer.
Leave Some Eggs Out of the Basket
March 19, 2012 – posted by Cody Wickham
All of us have heard the phrase “Don’t put all your eggs in one basket”, and yet some still choose to allocate a vast majority of their investable assets into a single firm or sector. Does anybody remember Lehman Brothers? AIG? WorldCom? Enron? The list goes on and on. People believed and trusted in these firms, enough so to invest most of their assets, which they would soon watch diminish into a mere shadow of what they originally had. In early 2008, economic hardship and volatile markets sent investors running for the hills, but the damage had already been done.
Lehman Brothers, at one time, was the fourth largest investment bank in the United States, behind Goldman Sachs, Morgan Stanley, and Merrill Lynch. Lehman held substantial positions in subprime and other low-rated mortgages, and were leveraging them to the fullest of their abilities. Things took a turn for the worse in 2008, when huge losses accrued in the subprime mortgage sector. By June of 2008, Lehman Brothers stock had lost 73% of its value and reported losses of $3.9 billion. On September 15th, 2008 the firm filed for Chapter 11 bankruptcy protection following a massive exodus of its clients, dramatic losses in its stock, and a devaluation of its assets by credit rating agencies. The Lehman Brother collapse was the largest bankruptcy in United States history and it played a major role in the late 2000’s global financial crisis.
The collapse of Lehman Brothers shook the world financial system, sending markets into a volatile rollercoaster, freezing the credit markets, and destroying the trust between investment banks and individual investors. The financial epidemic caused havoc for companies all over the world. Companies like General Electric (GE) one of the world’s largest multinational conglomerates, had trouble financing its day-to-day operations due to frozen credit markets. If General Electric can’t get financing, who can?
When are we ever going to learn from our mistakes? Within the last decade we have had two significant meltdowns in the financial sector, the first coming in early 2000s with the dotcom boom, and the second coming just six years later when the housing market collapsed. Some of the damage could have been mitigated with diversification, but not all. Overweighting one particular company or sector can be a gamble when dealing with risk prone investments. According to the Washington Post, the average employer-sponsored retirement account holds around 40% company stock. While this may seem like a safe play, true diversification involves investing outside your own company. Although the pain from these meltdowns has subsided, the wound is still there, waiting to be re-opened.
Run-down on 401k Advice
November 21, 2011 – posted by Cody Wickham
Unfortunately, most individuals are not savvy Wall Street investors, but there are options available to those struggling with retirement planning. In a recent Gallup poll, 66 percent of Americans ranked not having enough money for retirement as their top financial concern. So, if you’re uncomfortable analyzing the various fund options in your company plan, weighing associated expenses and fees, and developing a diversified mix of funds, then here’s a run-through of what’s available. A majority of individual investors choose a managed account approach, in which a professional money manager develops and monitors a tailored investment portfolio. Professional money managers often charge a fee of 1% or more depending on the assets under management, on top of the associated expenses and fees. Usually, a sophisticated computer program will select an appropriate allocation based on age, pay, expected date of retirement, size of 401(k), and contributions. Once an allocation is implemented, it is regularly rebalanced and adjusted as personal and market conditions fluctuate.
Another option offered to the individual investor is the widely available and sometimes free do-it-yourself services. Although this approach to retirement planning is the least used, statistically it’s the most effective. Online investors typically have higher earnings, save a higher percentage of their pay, and have larger account balances than those using managed accounts or those choosing to avoid help altogether. Online retirement services generally ask but not require personal information to aide in their recommendation process; the problem is most individuals are reluctant to provide such information. And without it, you’re not going to get what you paid for. There are retirement and wealth management solutions available; however investors are reluctant to take advantage of them. Individuals simply set their contributions and ride the market volatility rollercoaster, instead of taking the necessary steps to proper retirement planning.
To read the full article visit: http://online.wsj.com/article/SB10001424052970204346104576638933476020932.html
Beware of Senior Scams
October 31, 2011 – posted by Cody Wickham
As if pre-retirees and retirees don’t already have enough to think about with regards to their financial situations, now they must worry about being targeted for scams and fraud. A growing problem among the elderly, it is interesting to note that the criminals who prey on these elderly citizens are elders themselves. Being in the same age group, these crooks understand their target very well because they themselves are in a similar situation. There have been multiple cases recently of older financial advisors creating fake investments for their older clients.
There is a new financial regulatory bill that will help seniors by paying closer attention to financial advisors who “market themselves as specialists in investments for seniors”. Increased regulation is very important as we move forward because this is something our seniors should not have to worry about, but unfortunately they appear to be an easy target.
Retiring a Millionaire
October 17, 2011 – posted by Tim Giampetroni
Retiring a millionaire can be easier than it seems. That is, if you can start relatively early and you are able to invest about $300-500 a month. What turns this somewhat small amount of money into something impressive is compounding interest. This works like a ‘magic hand’ over time, doubling your money every 10 years. "It's less about where the money is invested and more about your ability to be disciplined" says Nathan Dungan, founder of the financial education firm Share Save Spread.
As you get older, achieving this benchmark of one million dollars becomes increasingly more difficult and requires a larger monthly investment. However, if you are able to start investing early, at say 25 or 35 years of age, all it takes is $320 or $775 a month respectively to retire with a million dollars. While it may appear to be a daunting task, investing in your future early can be extremely beneficial and provide a safety net for yourself and your family.
401(k) Mistakes – Part 2
October 3, 2011 – Cody Wickham
Cashin’ Out: Do you like paying penalties on top of taxes? If not, then there is no reason to cash out your 401(k) if you’re under the age of 55. Almost half of employees cash out their 401(k) when leaving one company for another. What employees don’t know is that they can roll the money over into an IRA or a new 401(k).
Wrong Target: Target-Date Funds are used by about one-third of 401(k) participants, but few are properly used. Target-date funds allocate assets based on the year you plan to retire, and steadily become more conservative when nearing the maturity date. Where the problem lies, is that these funds don’t allocate based on market conditions. So for example, say your target-date fund is supposed to mature in 30 years, and is currently in an aggressive allocation. If the market stumbles like during the bear market of 2000 through 20002 and the financial crisis of 2008, your fund will still be sitting in an aggressive allocation, instead being tactically rebalanced into a more conservative allocation, which can potentially lose you a great deal of money.
Rebalance, what’s that?: Allocating your 401(k) into stocks, bonds, and cash is one of the first things when signing up for a 401(k). Over time these allocation within the 401(k) become skewed due to the underlying investments and their performance. Rebalancing on an annual basis can prevent this, and keep your 401(k) allocation in line.
401(k) Mistakes – Part 1
September 19, 2011 – posted by Cody Wickham
Don’t Miss out on the Match: You should be investing in your 401(k) plan, even if it is not your primary means of retirement, for the simple fact that your employer contributes money to it. So contribute enough to get the full company match, its free money, take it.
Betting Against the Odds: Companies will sometimes offer shares as an investment choice for a portion of your 401(k). It’s recommended that one only invest five percent of your 401(k) in the company that employs you, this will diversify your investments and make your portfolio less volatile. Take for example Enron, which collapsed in 2001, due to bankruptcy and fraud. Employees of Enron not only lost their jobs, but also lost their retirement savings, because it was tied up in the company. Nearly one-third of the employees had 20 percent of their 401(k) invested in shares, when the company collapsed the value of shares followed. Employees of Enron had over $1 billion invested in company shares. In simpler terms, don’t put all your eggs in one basket, diversify.
Halting Contributions: It’s common for employees to set their contribution level to six percent, which is usually the minimum required to get the full company match. When employees receive a raise or bonus, they should set aside a percentage of it to contribute to their 401(k). For example if you get a four percent raise, then contribute two percent of that to your 401(k), your paychecks will still go up, and so will your retirement fund.
The New Era 401(k)
August 3, 2011 – posted by Tim Giampetroni
There are a number of proposals looking to replace the hated 401(k) retirement plan. First up, is the New Benefit Platform for Life Security (NBP) which was proposed by a trade group of retirement plan administrators. The plan has the portability of a 401(k), but also absorbs financial market risk like a pension, so you don't have to. Another perk that the NBP provides, is that it is not under the control of your employer, instead it's managed by a network of private financial institutions. Taking it out of your employers hand also gives you freedom, because if you leave, retire, or get laid off, your NBP stays with the administrator of your choosing instead of with your old company. The NBP also parallels some of the qualities of an IRA, in that it's a retirement plan that is self setup. It is also different from an IRA, because it does not limit contributions to $5,000 a year. This New Benefit for Life Security plan seems to be a conglomeration of different retirement plans rolled into one, which gives you the advantages without the disadvantages.
Congress Attempts to Protect Workers 401(K)
This bill conceptually, will make it more difficult for workers to tap into their 401(k) retirement funds, and at the same time make it easier for individuals to pay back loans outstanding against their 401(k). A staggering 28 percent of 401(k) holders have outstanding loans on them, with the average loan size close to $8,000. Many participants like the ability to take out loans in case of an emergency, but these accounts should not be treated as a piggybank, taking money anytime one pleases.
The new bill would make it possible for 401(k) holders to out three loans maximum, instead of having the employer decide how many the employee can take out. This way it's governed making it more difficult for employees to misuse their retirement funds. Another stipulation the bill would incorporate would be a ban on 401(k) debit cards, which are uncommon as is. The bill would also allow for longer pay back periods on outstanding loans, further protecting and helping workers. Retirement funds are supposed to be untouched until retirement, but in poor economic conditions, they sometimes have to be cracked open in order to stay afloat.
Fast Approaching Retirement- TF
August 3, 2011 – posted by Tim Giampetroni
With retirement looming near (3-10 years), many pre-retirees realize their portfolio needs to grow fast in order to reach their desired 'number'. The mindset that you need to get aggressive in your investing can easily backfire, and probably is not the smartest strategy. Many portfolios of pre-retirees, about a third, have either very little stake in stocks (>25%) or a complete stake in stocks (80%-100%). While stocks are "the driving force in a long-term portfolio", the key is finding the right balance of stocks. Many financial firms believe your portfolio should contain a 40%-60% stake in stocks. The combination of this portfolio strategy, while at the same time cutting back spending, can prove very advantageous. Rande Spiegelman of Charles Schwab Corp. goes as far to say that if you maintain a portfolio mix similar to what we mentioned, you have a 90% probability of your money lasting 30 years—pretty impressive. There is always risk associated with the stock market, and if you really can't afford to lose what you have now, a smaller stake in stocks may be more suitable. Whichever strategy you decide, always be careful of getting too aggressive by seeking big gains because many times it can work in the opposite direction.
Black Swan Fund- TF
August 3, 2011 – posted by Tim Giampetroni
Would you invest millions of dollars in a fund that on average loses money 95% of the time? If you thought no, think again. Mark Spitznagel, founder of Universa Investments, calls his investment fund a 'black swan fund' which places bets that some sort of disastrous event will occur and rock the equity markets. He does not look or care about the short term returns, but the "much longer returns, a necessity when dealing with rare events". It is a very interesting strategy and if you are able to stomach the frequent losses, you may be rewarded if disaster does strike. John Paulson made billions of dollars when he bet against the housing market boom following a similar strategy. While it may not be the smartest idea to hold large quantities of these 'black swan' stocks, implementing a few into your portfolio could pay large dividends when the rest of your portfolio takes a nose dive. Universa Investments has grown to $6 billion in assets from $300 million when launched in 2007 using this strategy.
Outliving Your Assets
August 3, 2011 – posted by Tim Giampetroni
Simply put, people are living longer and longer, which in turn is straining insurance companies as well as the individuals who are receiving monthly distributions from policies. This concept is known as Longevity Risk, and it refers to the risk of living longer than expected and not having the assets to do so. Usually the blame falls on the investor for not setting aside enough assets to cover the lifespan of the client. Monthly distributions from an annuity or a pension plan are lifetime guaranteed, which is where the problem lies. It doesn’t take an astrophysicist to figure out that the longer you live, the higher number of monthly distributions you receive. This is not a problem on the client’s behalf, but unfortunately weakens the host company.
Stable insurance companies have the ability to cover expenses related to longevity issues, while other companies may not be so fortunate. Since these companies are obligated to pay monthly distributions, choosing a well rated company is crucial.
No one knows how long their going to live, but planning ahead, means staying ahead. So don’t sell yourself short, set aside enough assets to ensure your retirement and future. This can be done by properly managing your assets, and having the expectation of long life.