09 May Your Financial Advisor 401K Management Tips
Once you know that your company offers a 401K, it’s time to start asking the right questions so you can maintain your retirement funds and do your part to help the money grow. Here are some practical management tips that will increase the chances of your financial security at retirement.
You should be aware of your company’s vesting schedule to know when you actually have access to the money. This is especially true for Millennials, since people in this age group tend to change jobs about every four years, and may not be getting any retirement benefits from their various jobs because the money hasn’t vested yet. According to financial professionals, about one in every four people who changes jobs has forfeited retirement money, and this is the case for one out of every two Millennials. It’s important to think about retirement income when making career moves.
When you initially put money into a 401K, you’ll receive a significant tax benefit. You’ll also see that your salary has been reduced, because your money is going into your retirement fund. However, by the time you’re ready for retirement, you’ll have hundreds of thousands of dollars in your 401K, but you’ll be taxed each time you withdraw the money. This results in a huge bill for you, and of course, it cuts into the money you use to live after retirement.
Keep in mind that 401K assets are pretax, and all the funds are taxable. So, if you have $10,000 in your 401K, and you’re in the 25% tax bracket, you actually only have $75,000 that you can access. This is part of the reason that some employers are now offering the Roth 401K to employees, and this retirement fund is especially beneficial for those in their 20s and 30s. taxes have already been taken out, so if you use the Roth 401K, you won’t have to pay additional taxes when you withdraw the money. However, less than half of all employers provide the Roth 401K option, and only about 7% of employees are actually using it. If you think the Roth retirement savings plan is best for you, consult with your financial advisor.
Monitor Your Withdrawals
Once you retire and are able to access the money, don’t take out too much too soon. It’s best to withdraw no more than 5% from your retirement account each year. If you have additional assets, the number can be a little higher. If you retire at an older age (around 70), your retirement time is shorter, which means you may be able to withdraw higher amounts. If you also have a pension, this could give you access to 401K withdrawals at a higher rate. You may also be able to take advantage of a higher rate if you work part-time during retirement or own rental properties or other forms of real estate.
In addition to these tips, it’s also very important to have a fund for emergencies. Start an emergency account in addition to your 401K, so that you’re not cutting into your retirement fund when unexpected events come up. This will give you access to your 401K for a longer period of time and help you avoid penalties.