Brian and Bo cover different strategies and steps to take when preparing for retirement and review features that are available in your 401k. The motivation for this show is two articles that finance blogger Dana Anspach recently released about 401k’s and other retirement accounts, 7 Things I Wish People Knew About 401k Plans, and 7 to-do’s before you turn 59.
First, the guys give you their view on Dana’s 7 Things I Wish People Knew About 401k Plans article:
- Rollovers are accepted – If you leave you can roll your retirement assets out of your 401k. This is especially important when your 401k investment lineup is limited.
- Automated portfolios work – Target date funds are great choices and capture a ton a diversification with professional investment management all wrapped into one holding.
- Stable value funds can be a great choice – If you are nearing retirement you need to start moving some of your holdings into more liquid and secure investments. These stable value options often pay solid interest rates which are typically much higher than what the bank will offer you on your savings account. Dana recommends having your first two to three years of retirement expenses in these holdings (and we completely agree).
- Age 55 is special! 401k’s allow distributions when you leave your employer after you reach age 55 without being subject to the 10% early withdrawal penalty. However, you will still owe ordinary income taxes on the distributions. Also, if you took the advice in the 1st step and rolled your 401k into an IRA, we suggest you have a plan for the age 55-59½ “donut hole.”
- Credit Protection – That’s right, if your get sued your Qualified Plan assets are protected, even from bankruptcies! OJ Simpson is always a major example when he was sued but was able to save some of his wealth due to the ERISA protection regulations.
- Roth options inside your 401k are great – There are pros and cons to this option. You forgo the tax deduction that you would have received for normal pre-tax contributions, but you do get the advantage of tax free growth if executed correctly. Remember, it is good to have tax diversification also. No one knows what future tax laws may hold. Therefore, it makes sense to have different “pots” of money (see our last podcast) set aside for the future.
- NUA treatment is nice, if it makes sense – If your employer offers company stock, you can get special tax treatment on distributions at retirement, called Net Unrealized Appreciation. When you take a lump sum of the company stock, the contributions you received (basis) are taxed as ordinary income and any growth in that company stock receives capital gains treatment, if certain holding requirements are met. You can also roll the other non-company stock portion of your 401k into a Rollover IRA.
The second article that Brian and Bo cover from Dana is, 7 to-dos between 55 and 65 for a better retirement:
- Prioritize values – Would you prefer to retire early and have less or work longer and have more?
- Know your net worth – We push for everyone to complete a Net Worth statement at year end. It is a great feeling when you put everything together and are able to high five over the leaps and strides you have accomplished over the past year, two or ten, and longer.
- Estimate your benefits – Review any pensions that are you expecting and try your best to estimate your Social Security payments. These factors are huge when trying to calculate your current savings goal for your future use.
- Get a handle on healthcare – We see this far too often when people tell us they would like to retire early, but do not have a plan for healthcare. Medicare coverage does not start until 65 and most of the time you will need additional coverage’s like: Medicare part B, C, D, Medigap, Long-Term Care, etc… Make sure you have options lined up before your decide to retire early.
- Make an income timeline – Run your personal finances the same way that you would operate a business. In actuality, you are a business and your success depends on your planning. Set income and savings goals and make sure that you are doing everything possible to insure your future success.
- Outline options – Explore what income sources are available at retirement. Part-time jobs are usually great because they keep you busy and keep your savings untouched to grow a little bit longer.
- Determine your level of engagement – What responsibilities are you going to take care of and what makes sense to outsource? Everyone’s situations are different and complex, but you need to have a basic understanding of how things change when you near retirement and what new risks you face.
Check back in two weeks for our next show!