3 Potential Disadvantages Of A 401K

If you are an employee and your employer offers you access to the company 401k plan then by all means you should probably participate. Especially if your employer is making contributions! But be advised that there are some disadvantages to being involved in a 401k.

The first potential problem with a 401k may be that the provider offers either poor performing funds or a poor selection of funds or both!  Let's imagine that you are in the final five years before your retirement and you have determined that you have too much exposure to the stock market. Go to one of my previous articles for the simple formula to gauge what percentage of your portfolio should be invested in stocks. There  are a lot of 401k providers that don't give you many options to accomplish this adjustment.

I am a participant in a leading 403b provider for ministers and their fund selection is woeful and left me pretty vulnerable in the great down turn of 2018. I finally made capital preserving adjustments but I wasn't entirely happy with my choices. If you haven't been on your 401k website and studied all the resources that are available to you then get to it immediately.

A second disadvantage of a 401k versus an IRA is that you don't have as much access to your money should the need arise to borrow. When you do borrow the money the consequences can be harsh. If you withdraw money from your 401(k) account before age 59 1/2, you will need to pay a 10 percent early withdrawal penalty, in addition to income tax, on the distribution. For someone in the 25 percent tax bracket, a $5,000 early 401(k) withdrawal will cost $1,750 in taxes and penalties.

A third potential drawback to a 401k is the fact that most providers encourage the practice of "dollar cost averaging". This practice simply means that you keep re-investing into your account regardless of whether or not the fund is doing well or not. When the market is roaring along this works pretty well. But when the market is down or volatile...not so much.

If you are a dollar cost average practitioner then you should be constantly monitoring the make up of your portfolio and weeding out the losers and exchanging them for winners. A 401k is a lot like a garden in that respect. You need to tend to your account. Too many employees blindly trust their employers to put them into a good provider and many let their employer choose the fund. How foolish!

If you have the chance to get into a 401k then by all means do it. Just remember that there can be some dangers to be avoided.

Where To Put Retirement Money After Retirement - Or Close To It!

Introduction

If you are approaching retirement and you are curious about how to invest your retirement money after retirement then you need to be a student of history and learn this lesson well. With 10,000 baby boomers turning 65 each day then there ought to be a bunch of you out there who need to read and heed this information.

The lessons of 2008 still speak loudly to the need to preserve capital in your final working years!

According to the Employee Research Benefit Institute something pretty disastrous happened just prior to the financial collapse of 2008. You see, the ERBI discovered that Americans who were between the ages of 56 and 65 who participated in a 401 k account were over invested in American stocks.

I know what you may be thinking. You are probably asking yourself "Isn't that what a 401 k account is for, to invest in stocks?" And yes those accounts are marvelous platforms to invest in the stock market but not when you are nearing the final 10 years prior to retirement and then the years following retirement.

You see, Americans who were in the 56 to 65 age range in 2008 had nearly 70% of their accounts invested in stocks. That represents almost 30% more risk then they should have exposed themselves to at that time of their working lives. The result, as we all know, was a blood bath in retirement savings losses.

Workers who had worked and saved for 20 years or more lost 25% of their account in the last two quarters of 08. Many lost 40% to 50% of their entire portfolio! This kind of calamity could have been averted by reducing risk and exposure to the stock market.

What could they have done?

So just how should a nearly retired or newly retired person be investing their retirement savings? Well there is a formula that is pretty much fool proof and here it is...you should subtract your age from 100 and that number represents the maximum percentage of your account that should be in stocks.

For example, if you are nearing retirement and are 62 years old then you should have no more then 38% of your savings in the market. If you are 70 and retired then your account should be only 30% exposed.

I would go as far to say that I think that 30% is too aggressive for a 70 year old but at the end of the day that is a decision you and I will have to make for ourselves.

Why stay in stocks at all?

You and I both know that people are living longer today than at any point in American history. Once you reach 65 your chances of reaching 80 and even 90 dramatically increase. Back when this formula was created people were not living nearly as long. But today we need to keep our toes dipped in the stock market to take advantage of the growth potential to ensure our funds will last as long as we feel necessary.

Conclusion

It's easy to see that many Americans could have drastically reduced their losses if they would have followed this rule. The typical worker who scrimped and saved for 20 years might have only lost 10 to 12% instead of the average 25%. While that number looks innocent enough on paper it mean't hundreds of thousands of dollars to many investors. The collapse of 2008 erased 2.6 trillion dollars from retirement accounts. The exposure to the market was disastrous for older workers and retirees.

Now if you are in your 20's or 30's you need to keep plowing that money into your IRA's, 401k or 403b and just hang on tight. But if you are in the red zone of retirement or already there then this old rule and the lessons of history should be your guide.

By the way, I wrote a short post on how to use a simple online calculator to determine how much to withdraw from your 401k on a monthly basis. You can check it out here "How Much Can I Withdraw From My 401k - The 4% Rule Reconsidered".

Invest your retirement money in fixed income funds, money markets, bonds etc. Seek capital preservation over aggressive growth. Take the anxiety out of your final working years!

How To Cut Costs In Retirement - Part Two

By now, you have probably learned that I am going to retire early at the age of 64. Now that may not be early to some folks but it is two years before my full retirement age. The average American worker retires at 63. Because of my plans I have been doing a lot of learning on how to cut costs in retirement and I am having some great success.

I say all of that because today I had an appointment that gave me the inspiration for this blog post subject. I took my car into the KIA dealership to have the oil changed, brake pads installed and front end aligned. Needless to say I walked out with less money than I arrived with.

It caused me to think about the enormous cost of operating a vehicle. I did some checking and according to AAA it costs $9,112.00 a year to own and operate a car, that is 60.2 cents a mile!

I believe that a person who is looking for a way to retire should consider living with just one car. I have been doing that for nearly 20 years. If you and your spouse are both retiring then there is really no reason, other than convenience, to own two cars (or three!).

Eliminating one car will add an additional $9,112.00 to your cash flow and represents another huge puzzle piece to your retirement goal.

I have said it repeatedly that retirement is going to be mostly about changes in your perception. We have been programmed all of our lives to believe that there is no way you can survive with one car. That is simply not true.

In fact, the town that I live in has three different bus lines running at all hours of the day and night. I could manage life with no car but I'm not willing to go that extreme just yet.

The long term ramifications of this one strategic move are enormous. If you maintained a one car household for the next 20 years you would save nearly $190,000.00! Do you realize that it would have the same effect as saving nearly $200,000.00 in a retirement fund?

If you are wanting to retire but don't think you can afford but you still have two or three cars what is keeping you from making this adjustment? How bad do you want retirement?

According to Experian the average family has two cars and a whopping 35% of American households own three! Americans are sinking a huge amount of their incomes into cars and it's why a lot of Americans are delaying or forgoing their retirement altogether.

You might now have thought about cars as a way to prepare for retirement but it's high time you did!

How To Cut Costs In Retirement - Part One

If you are like most Americans who are nearing retirement you are ready to rid yourself of the burden of work. Let's face it, even if you have a very exciting job there just comes a point where 40 plus years is enough. One of the ways you can make those more leisurely years affordable is to learn how to cut costs in retirement.

This past year I decided to find another expense to reduce or eliminate as a part of my retirement preparation. I found a good target that yielded big returns - cable TV. Now before you click off of this site just let me say that I have found a free and very satisfying alternative. That alternative was a digital tv antenna.

Before I go any further let me say that by cutting my cable TV I reduced my internet/TV bill from $177.00 a month to just $39.00. That is a savings of nearly $140.00 a month or nearly $1700.00 a year. That is a nice piece of the retirement puzzle for me.

Once I decided to cut the cord I did some research to see what TV channels were available to me in my area. I live about 35 miles from Kansas City so I felt that I had a good shot at a wide array of choices. You can check the availability of channels in your area by visiting this site.

Once I did my research I purchased a cheap antenna on Amazon. The fact that I only spent about $19.00 was a big mistake. This antenna was one of those flimsy squares that you can stick to the window or the wall. These types of antennas work well if you live in a metropolitan area but if you are a good distance from the broadcast towers you need to invest $50 - $60 in an attic mounted antenna.

My new antenna gets about 65 channels. I was able to install the antenna myself (very easy). I get a lot of the Kansas Jayhawk games and of course your major sporting events on the big four, NBC, CBS, ABC and Fox. This attic antenna gives clear reception and it pays for itself after only one month of cable billing!

I have been very happy with this decision but I did spend another $10 a month on Netflix and between these two avenues of entertainment I have more viewing choices then I could ever want. I really enjoy Netflix and have become a real binge watcher!

If you learn anything in this blog it is this...retirement is made possible, even for low wage earners , by putting together several pieces of the puzzle. My switch from cable to digital tv was a nice sized piece!

Retirement Strategies For Late Starters - Paying Off Debt After Retirement!

I recently read an outstanding blog post on how to get "retirement ready". You can read the article here.
It basically gives retirement strategies for late starters. According to this source half of Americans have nothing put away for retirement.  The good news is there is some hope for most of these folks if they act now.

The author lists six ways to fine tune your retirement plan. Of course, he listed saving more and working longer, no surprise there! However,  I was blown away by the fact that he listed "consumer debt reduction" as his first tip. The power of debt reduction or debt reorganization can help close the gap that exists between your retirement projected income and your real expenses.

When you start talking to folks about retirement planning they immediately feel threatened and uptight because they fear that you are going to suggest catching up on IRA contributions or some other tactic that involves moving money from your day to day life and into your future. However, debt reduction can have just as powerful an effect on your retirement plans as saving more and I will show you right now.

Let's assume that you are a blue collar worker who is in his 60's and you haven't saved enough to retire on your target date. Let's also assume that you are like most Americans and you carry $16,425.00 in credit card debt. That figure is from the Census Bureau and the Federal Reserve. While that number seems very daunting it does represent an opportunity to improve your retirement position.

If the interest rate is !8.9% and the minimum payment is 4% then the dollar amount on that minimum payment amounts to $657.00 a month and if you didn't add to that debt it would take 185 months (over 15 years) to pay it off.

Let's look at the best case scenario. You inherit some money or get a large bonus at work and you pay off that credit card balance. You don't acquire anymore debt. Your monthly budget just improved $657.00 a month or $7884.00 annually.

Let's frame this in a way that is much more powerful. If you invested $120,000 in a retirement fund that earned 3% interest you could draw $657.00 a month for the next 20 years!  Paying off that credit card debt would be equivalent to saving $120,000.00 in a retirement plan. You could get yourself much more retirement ready by alleviating this crippling debt. Which seems more attainable, saving $120000 or paying off  $16,425 in debt?

But let's be realistic because you probably aren't going to get a bonus or inherit the $16,000.00. But let's do something a little different. Let's refinance that $16,425.00 credit card debt through someone like Discover or Lightstream or any number of lenders who are clamoring for this debt consolidation business. You find a 6.99% interest for your $16,425.00 for 60 months and the payments are $325.00 a month.

You just improved your cash flow by $332.00 a month which is just under $4000.00 a year. You also have reduced your payoff time from 15 years to 5 years and then you will be enjoying the full benefit of $657.00 a month for as long as you remain debt free and you definitely need to be thinking debt free as you enter retirement.

Debt reduction is a powerful tool in your arsenal of retirement strategies!