Savings & Investments

You should begin planning for retirement whenever you start bringing home a paycheck. Although it’s easy to think when you’re 25 that you don’t need to start planning for retirement until you’re 40 or so, that’s a dangerous proposition. Starting early and saving small amounts every payday over time can generate more retirement income than attempting to invest large sums of money over just a few years. Here’s a quick example*:

Mary begins saving $100 a month in her retirement plan at age 25 and continues to age 65. If her investments realize a fixed 8% average annual return, she will have a $351,428 balance at her retirement time. Sam, on the other hand, doesn’t start saving until he is 35. To have the same plan balance as Mary when he retires (assuming the same 8% return), Sam needs to save more than twice as much ($234 a month).

* This investment return, which is compounded monthly, is intended only for illustrative purposes. Actual rates of return cannot be predicted and will fluctuate. Source: NPI.

Some would advise that it’s smart to start saving for your child’s college on the day you say thank you to your obstetrician. That’s not bad advice, given that some analysts predict in 10 years from now, the national average in tuition for a public college is expected to be in the range of $100,000, and $440,000 for a private college. Tuition costs are rising faster than the rate of inflation, so you need an investment vehicle that can keep pace. Our financial advisors will be happy to help you and your family come up with a personalized plan to conquer the costs of college.

Many investors think conservative investments are the way to counter the possibility of market declines. That can be a major mistake. Low investment risk can mean low returns that barely keep pace with inflation. Instead of choosing only conservative investments, you should consider how much risk you can take with your investment and then choose a mix of securities designed to offer the highest potential return given that level of risk. It’s also important to remember that the more time you have to meet your financial goals, the more opportunities your investments have to recover from the periodic declines that inevitably affect investment markets.

Shifting all of your securities-based assets into money market accounts and CDs at the point of retirement may not necessarily be the most beneficial. Conservative investments may not grow as much as you need them to; specifically, they may not be able to keep up with inflation. As a result, your standard of living may be eroded at a time when you should be enjoying it most. It may be better to preserve an investment mix with growth potential and gradually shift parts of your assets into more conservative investments as you are close to drawing on them.

The four most common retirement plan distribution options to choose from are:

DIRECT ROLLOVER INTO ROLLOVER IRA: A Rollover IRA allows you to move your eligible rollover money from your employer’s retirement plan directly to an IRA without paying current taxes or penalties. If you decide to keep your retirement savings working for you, a Rollover Individual Retirement Account (IRA) may be a smart choice because of its ease and convenience.

ROLLOVER TO NEW EMPLOYER’S PLAN: If you are changing jobs and your new employer sponsors a qualified retirement plan that accepts rollovers, you may opt to move your eligible rollover money directly into your new employer’s plan. Talk to the plan administrator at your new company, as rules and investment options vary.

LEAVE MONEY IN CURRENT PLAN: Generally, this option is available if your vested account balance in the plan is greater than $5,000. You may elect to take your money out at a later date or keep the money in the plan until normal retirement age. Many distribution options available to you today will be available when you decide to take your money out of the plan. While this may be the easiest course of action to take now, later on you may find it too restrictive. Check with your plan administrator for details.

CASH DISTRIBUTION: If you decide to take your retirement distribution in cash now, you may end up with much less than you were expecting. That’s because your distribution will be subject to:

• 20% automatic withholding
• Additional federal income taxes, up to 16% or more
• Early withdrawal penalty (If you’re younger than age 59-1/2, or have separated from service before age 55, you may owe another 10% of your distribution to the IRS.)
• State and local income taxes; If applicable, you may also owe state and local income taxes on your distribution

When deciding which option is best for you, a number of factors must be considered, so it is always best to consult with a financial advisor. He or she can talk with you about your goals and help devise the best financial plan to help you reach those goals.

An employer-sponsored 401(k) plan allows an eligible participant to contribute pre-tax dollars to a tax-qualified retirement plan. It may not be the same thing as the pension your parents or grandparents may have had, but it has the same goal: to help you pursue financial security for your retirement. There are several basic features of a 401(k) plan:

• You are permitted to defer some percentage of your pre-tax compensation into the plan. The maximum percentage permitted is determined (within certain limits) by your employer and is commonly no more than 15%
• Dollars contributed to the plan are generally not subject to federal or state income taxes (determined by state law) until you receive a distribution from the plan. Any investment gains and earnings also enjoy tax deferral until distribution.
• You may receive distributions from the plan when you terminate employment, retire or in the events of death or permanent disability as well as in any other situations permitted by your employer’s specific plan.

There are numerous advantages of participating in a 401(k) in addition to the tax savings that go along it. For example, in addition to your own contributions, your company may offer a matching contribution at a given level. Imagine receiving money towards your retirement, simply because you chose to participate in the plan! Any employer-contributed dollars are invested in your account and accumulate tax-deferred, until they are withdrawn, usually at retirement.

While the objective of a 401(k) plan is to help secure your retirement, some plans do allow loans, through which participants may borrow money from their own accounts and repay themselves accordingly. Other plans may offer distribution options such as hardship and in-service withdrawals. It is important to keep in mind that any withdrawals from a 401(k) account (excluding loans, unless they are not repaid), are taxable as ordinary income and may be subject to a 10% early withdrawal penalty if the participant is under age 59-1/2. Consult your plan administrator for specific details concerning your particular plan and the options available.