5 Reasons Why You Should Take Advantage of that 401(k)

When it comes to planning and saving for retirement, it’s not uncommon to feel overwhelmed by the mere thought of the notion. While we all want to bask in the glory of an eternally comfortable golden era, getting there does require an investment of time and, of course, money. But the road to retirement is long and paved with detours.

 
Fortunately, most working Americans already have access to an easy-to-understand and even easier to buy retirement product, the staple of almost every employer’s defined contribution plan — the 401(k). Appropriate at nearly every age and every point in your career, investing in a 401(k) is a smart way either to begin or supplement your retirement savings plan. Below are five simple reasons why you should absolutely take advantage of that company-offered 401(k).

 
It’s one of the easiest and fastest investments to purchase

 
Setting up your 401(k) is one of the easiest investment experiences you’re likely to have. This is because in most cases, you simply ask your company’s human resources guru to enroll you in the company’s defined contribution plan. Some companies require you to have worked for the organization for a certain period of time before you’re eligible to participate in the company 401(k), but once you’re ready to contribute, all you need to do is tell HR how much you’d like to contribute and how you’d like them to invest your funds — they handle all the details and take the contribution from your paycheck.

 
Your savings accrues tax deferred

 
One extraordinarily appealing aspect to 401(k)s is that all the money you invest grows at a compounded, tax-deferred rate. You continue to earn tax-advantaged benefits until you start withdrawing your funds, at which point you must pay taxes on that money. Furthermore, anything you contribute to your 401(k) in a given tax year can be taken as a deduction, lowering your taxable income. And because of its tax-deferred status, increasing your contributions even by a little bit can lead to dramatic 401(k) growth over time.

 
You can choose how much you want to invest, and how you’d like it invested

 
With a 401(k), you get to decide how much money you can contribute to your plan; not your employer or the company managing your funds. There is, however, a yearly maximum to what you can contribute, but it’s still more than how much you can put into an IRA. Your annual maximum contribution depends on your age: This year’s maximum is $17,000 if you are younger than age 50, and $22,500 if you’re age 50 or older. As for the investment itself, your employer uses either a brokerage firm, insurance or mutual fund company to manage your retirement plan, but you get to choose how that company invests your money based on your risk tolerance and investment preferences. Most 401(k) plans allow you to choose from at least five different mutual funds, bonds or money markets representing different market sectors and degrees of risk. A few organizations even allow their employees to add company stock to their 401(k)s.

 
If your company matches a portion of your contributions, it’s like a free bonus check

Many companies offer an incentive to encourage their employees to save for retirement by way of matching a portion of your own contribution to your 401(k) plan. The match can vary, but 50 cents to the dollar is a common employer contribution. Employers also have a set maximum of how much they’ll match your contribution, basing it either on a percentage of your annual salary, generally from three percent to six percent, or less commonly, on a predetermined dollar amount. This company match is like a bonus, for all intents and purposes, so make every attempt to contribute what’s necessary to get the highest match possible.

 
A simple way to make saving for retirement automatic

 
Once you’ve elected your contribution amount and investment options and communicated those choices to your HR department, that’s pretty much all you have to do. After that, your employer automatically deducts the percentage of income you’ve allocated to your 401(k) directly from your paycheck. You’ll most likely receive quarterly earnings statements from your employer’s plan manager, and some companies also make this information available to employees on a secure website.

 
When all is said and done, you’ll have a solidly structured and properly managed 401(k) working quietly yet constantly in the background, generating retirement savings.

Photo courtesy of: http://www.thetutorreport.com

Read Full Post »

Borrowing From Your 401(k): A Financial Sin

When we put money into our retirement accounts we do so for a specific purpose: retirement.  All the money you have funneled into your 401(k) is supposed to buy you that dream retirement lifestyle you spent your entire life working toward.  But unfortunately, more and more people are finding that life can throw them curveballs that, in turn, can throw off their financial plan.  Often times, when people find themselves in a financial bind, they find it hard to ignore that shiny apple hanging in front of them in the form of their 401(k).

Far too often people are reaching out to pick that apple and borrow money from their 401(k).  The reasons for their need varies from home purchases, to their kid’s college tuition, to a myriad of other financial emergencies.  Most people who make this move know that it’s a “forbidden” action, but what many people don’t understand is why.  What is the danger in picking that apple and borrowing money from your 401(k)?  If more people knew the consequences, it would be hard to believe that many of them would make the same decision.

So what’s the big deal about borrowing from your 401(k)?  What are those consequences that your financial advisor seems so concerned about?  Here are just a few.

• Paying back means you’re not paying in- After you borrow from your 401(k), what you would have contributed to add to your funds now will go towards simply trying to pay back what you took.  Anyone planning for retirement understands the power of time in terms of compounding your money.  That is what is driving your growth.  If you stop paying in and adding to your total, you lose out on all of that potential growth.
• Tax Trap- When you pay back a loan from your 401(k) you do so with after-tax money.  When you retire, and take this money out later, it gets taxed again like the rest of your 401(k) contributions.  Essential this means you are paying a tax twice for that single amount of money, both as your pay it back now and as you take it out later.
• Job Insecurity = Loan Insecurity-  When you borrow from your 401(k) you typically have a set time period to pay it back, usually within five years.  This may seem acceptable, but this changes if you leave your current employer.  If, for any reason you stop working for that company, you could be forced to pay back the loan much sooner, possibly in as little as 30 days.  If that new, incredibly abbreviated time frame isn’t possible for you, you will make up the difference in penalties and fees.
• Creditor Vulnerability- When your money is inside of your 401(k) it is in something of a safe-haven from creditors.  They are unable to touch it.  This changes as soon as you pull any money out of that plan.  At that point, whatever you took out is now fair game for any creditors to go after.
• Short Term Solution- In many cases, borrowing from your 401(k) is like using a band-aid to cover a bullet wound.  If you are in a position where you don’t have the funds to cover your bills, for example your mortgage payments, pulling money from your 401(k) will only stall the inevitable.  It isn’t a long term solution and it doesn’t give you plan to create a long term solution.  Not only does it delay the growth of your retirement finances, but it often times will leave you just as injured as you were before.

So despite the fact that your 401(k) might look like the perfect solution to a financial shortage, the consequences might be harsher than you know.  If you layout all the effects of picking that forbidden fruit you might think twice before you take a bite out of the apple of your future.

Photo Courtesy of: mint.com

Read Full Post »

The Ricks Report – July 16, 2012

The Ricks Report

July 16, 2012

The Markets

Should the Federal Reserve raise interest rates to fire up the economy?

For the past few years, the Fed has been on a mission to lower rates as much as possible. The thinking is lower rates will spur economic growth by making it less costly for businesses and consumers to borrow money.

Unfortunately, it hasn’t quite worked as planned.

Short-term interest rates are near zero and 30-year mortgages are at a record low, yet the economy is still just muddling along, according to Barron’s. Now, some investment managers are saying the Fed should reverse course and raise interest rates.

Last week, prominent money manager David Einhorn went on CNBC and said, “I think having very low zero rates is depressing to people. I think it deprives savers of reasonable incomes, the ability to forecast a reasonable income, and it cuts down on consumption.” He went on to say low rates drive up food and oil prices and lower standards of living.

Folks relying on a stream of income from their fixed investments can probably relate very well to what Einhorn is talking about. As recently as July 2007, $100,000 worth of 1-year Treasuries would have generated about $5,000 of annual income (a 5 percent yield), according to data from the Federal Reserve. Now, it would generate only about $200 (a 0.2 percent yield).

The Fed may be in a classic Catch-22, according to CNBC. With sluggish economic growth, it’s certainly hard to justify a rate hike, yet, low rates are increasingly ineffective. CNBC says a growing number of analysts suggest the best course of action is to allow “the cash-rich private sector to sort out its own problems without the government’s interference.” However, they acknowledge it “likely would be painful, but could be the only sustainable path to recovery.”

With the Fed on the record as saying they plan “to keep interest rates at their historically low range of 0 to 0.25 percent through late 2014,” investors shouldn’t expect the Fed to raise rates any time soon, according to Fox Business. Only time will tell if this low rate strategy is the right medicine for the economy.

Data as of 7/13/12	1-Week	Y-T-D	1-Year	3-Year	5-Year	10-Year
Standard & Poor’s 500 (Domestic Stocks)	0.2%	7.9%	3.1%	14.6%	-2.7%	4.0%
DJ Global ex US (Foreign Stocks)	-1.1	-0.2	-17.4	5.7	-7.9	5.2
10-year Treasury Note (Yield Only)	1.5	N/A	2.9	3.4	5.1	4.6
Gold (per ounce)	0.5	1.3	1.1	20.7	19.1	17.5
DJ-UBS Commodity Index	2.5	-0.2	-14.8	7.2	-4.3	3.5
DJ Equity All REIT TR Index	0.9	17.3	12.7	34.8	2.3	11.6

Notes: S&P 500, DJ Global ex US, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.  Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.

Past performance is no guarantee of future results.  Indices are unmanaged and cannot be invested into directly.  N/A means not applicable.

HOW DO YOU TURN A PENNY INTO 1.25 BILLION DOLLARS? Sounds like a magic trick, right? Well, there’s really no magic other than the law of large numbers.

Here’s how it works and how it may benefit our economy.

A report from the Federal Highway Administration shows Americans traveled approximately 2.94 trillion miles in motor vehicles for the 12 months ending April 2012. Now, when you figure how many gallons of gas that burns up, you get a really big number! Moody’s Economy.com chief economist Mark Zandi has done the math and, by his reckoning, each penny change in the price of a gallon of gas equates to, you guessed it, about $1.25 billion over the course of a year, as reported by CNBC.

With the wild swings we’ve seen in the price of gas, the savings – or cost – can add up quickly. A recent check with AAA showed the average price for a gallon of regular gas dropped by about $.25 over the past year. So, multiply $1.25 billion by 25 and you get, to quote Carl Sagan, “billions upon billions” of additional coin in consumer’s pockets. And, that coin could fuel further growth in consumer spending.

You’ve heard the old saying, “A penny saved is a penny earned.” Today, a few pennies saved on gas can add up to billions!

Weekly Focus – Did You Know…

There’s about $1.1 trillion of US dollars in circulation today – an all-time record high. However, most of it is not “floating” around in everyday transactions. About 75 percent of the $1.1 trillion is in $100 bills which don’t circulate much. On top of that, about 50 to 66 percent of U.S. cash is held abroad. Despite the proliferation of credit cards and debit cards, we still seem a long way away from a cashless society.

Source: CNNMoney

Best regards,

Gregory Ricks

Read Full Post »

The Ricks Report – July 9, 2012

The Ricks Report

July 9, 2012

The Markets

Where is the recovery in jobs?

In the 10 recessions between World War II and 2001, the jobs lost during the recession were fully recovered within 4 years of the previous peak in employment, according to the blog, Calculated Risk. In fact, with the exception of the 2001 recession, the previous 9 recessions had recovered all their lost jobs within a relatively short 2½ years.

The 2007 recession, however, is a different story.

At its nadir in February 2010, the U.S. economy had shed nearly 9 million jobs from its prior peak, according to the Bureau of Labor Statistics (BLS). As of last week’s June employment report, the U.S. economy had recovered less than half of those lost jobs – and we’re more than 4 years removed from the peak employment level of late 2007, according to the BLS.

Why has the jobs recovery from this recession been so painfully slow? Here are several reasons:

(1)   Recoveries from recessions caused by financial crises – like this one – are notoriously slow.

(2)   Extremely high economic policy uncertainty emanating from Washington made corporations cautious in hiring.

(3)   The extension of unemployment benefits to 99 weeks reduced some people’s desire to find new work.

(4)   Uncertainty from events related to the euro crisis dampened business demand and the need for more workers.

Sources: Gary Becker, Nobel Prize Winner and Richard Posner blog; The Wall Street Journal

There is some good news, though, that could eventually provide a spark for new hiring.

Corporate profits as a percentage of gross domestic product (the value of all goods and services produced in the U.S.) recently hit an all-time high, according to Business Insider. This means corporate profits are at record levels. On top of that, corporate cash levels have reached historic highs which suggest corporations have plenty of money to reinvest for growth, according to Yahoo! Finance. With corporate profits and balance sheets looking solid, all we have to do is get these companies to start spending some of that cash on new hires. If that happens on a large scale, it could be a huge boost to the economy and the financial markets.

Data as of 7/6/12	1-Week	Y-T-D	1-Year	3-Year	5-Year	10-Year
Standard & Poor’s 500 (Domestic Stocks)	-0.6%	7.7%	0.8%	14.7%	-2.4%	3.3%
DJ Global ex US (Foreign Stocks)	-0.1	1.0	-17.8	5.4	-7.4	4.6
10-year Treasury Note (Yield Only)	1.5	N/A	3.1	3.5	5.2	4.8
Gold (per ounce)	-0.7	0.8	3.9	19.7	19.6	17.7
DJ-UBS Commodity Index	1.1	-2.7	-13.8	5.0	-4.4	3.4
DJ Equity All REIT TR Index	1.2	16.3	10.2	33.2	2.0	10.9

Notes: S&P 500, DJ Global ex US, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.

Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.

Past performance is no guarantee of future results.  Indices are unmanaged and cannot be invested into directly.  N/A means not applicable.

INVESTORS HAVE GROWN VERY FICKLE in recent years as measured by how long they hold on to a stock. There was a time when investors were really investors and bought a stock for the long run. In fact, between 1940 and 1975, the average length of time a New York Stock Exchange stock was held before it was sold was almost 7 years, according to data from the New York Stock Exchange as reported by a September 2010 Top Foreign Stocks blog post. By 1987, it had dropped to less than 2 years. And, in the highly volatile year of 2008, the average holding period was less than 9 months, according to The New York Stock Exchange.

So, does this fast trading result in better returns?

A highly quoted study by Brad Barber and Terrance Odean of University of California-Davis published in April 2000 analyzed the results of nearly 2 million trades from a discount brokerage firm between 1991 and 1996. The study concluded that the 20 percent of investors who traded the most frequently underperformed the 20 percent of investors who traded the least frequently by a whopping 7.1 percentage points on an annualized basis after expenses.

The main conclusion of the study was, “Trading is hazardous to your wealth.”

One very interesting tidbit from the study was the gross returns between the frequent and infrequent traders were basically the same. In other words, stock selection was not a problem for the fast traders; rather, it was the expenses of the frequent trading that caused their net returns to lag far behind the infrequent traders.

From a practical standpoint, selling a stock is necessary from time to time. The study simply drives home the point that keeping trading costs as low as possible is critical to having net returns come close to gross returns.

Weekly Focus – Think About It…

“Learn every day, but especially from the experiences of others. It’s cheaper!”

—John Bogle, founder of The Vanguard Group

Best regards,

Gregory Ricks

Read Full Post »

The Skeletons in the Closets of Your 401(k)

401(k) plans have been the longstanding backbone of most retirement plans, and for good reason with their contribution matching programs, tax exempt contributions and tax free earnings during growth.  They seem like the perfect fit for most investment plans, but as most of us learn the hard way, anything that seems perfect means there is something we don’t see.  There are always skeletons hiding in the proverbial closets of every dream scenario.  Unfortunately 401(k) plans follow that rule with a skeleton of their own that many people who contribute to the accounts aren’t aware of: Fees.  These fees come from the processing and holding of the plans at each layer of distribution such as administration, investment management, and so on.  The perks of 401(k)’s come with a price.  The tricky part of that falls in the fact that most of the 60 million or so workers with a 401(k) are completely unaware of what that price actually is.  The even trickier part… neither do the employers who provide the plans to those employees.

The extent of this was discovered in a recent report provided by the Government Accountability Office after they surveyed plan-sponsoring companies regarding their knowledge of the 401(k) plans they provide to their employees.  The results were a both surprising and a little disheartening.  The vast majority of the companies didn’t even bother to ask their providers about specific fees that were charged.   For example, a startling 82% of employers never questioned whether there would be fees to reimburse the record keepers that handled administrative tasks involved with the plan (the answer to which is most often yes).   Half of the companies weren’t aware if there were further fees charged for the management of the investment or they mistakenly assumed that they weren’t charged for them.

Even more startling is the lack of companies that took the time to understand the fees and costs disparity between providers in order to make a smart decision of which to choose.  Less than 6% of all the companies surveyed referred to an agency publication from the U.S. Department of Labor, which are designed specifically to help employers understand the fees issued by different providers.

It’s evident that most companies don’t do their homework in terms of understanding the fees surrounding their 401(k) programs, which waterfalls into the lack of knowledge on their employees’ part.  The question is: why?  The success of a company in the business world is based around determining the most profitable avenue for their needs, so why do they skimp in understanding the fees of their 401(k)’s.  Many believe the answer is simple:  Their decision doesn’t cost them, it costs their employees.  Most of the fees surrounding 401(k)’s are paid on the employee’s end.  It’s easy to whimsically toss into the cart whatever product you see first if it’s not your wallet being cracked open at the checkout.

This situation is a troubling one for employees across the country and it’s a problem that has been recognized by the Federal Government.  The solution?  A requirement of transparency between plan providers, the employers, and their employees.  Beginning in July, the Department of Labor will raise the standards required in the disclosing of fees surrounding 401(k)’s.  Detailed fee information must be supplied by the provider to the employers, who must in turn share that information to their employees, giving the employees a chance to see and understand the skeletons that have been kept behind the closed doors of their plans.

Sounds like the perfect solution, right?  Well, as we have learned, “perfect” should raise some red flags.  The bad news is that the Department of Labor isn’t requiring the disclosure of all the fees and also doesn’t offer any sort of benchmark comparison between companies, which can still leave many workers floundering in a sea of obliviousness regarding their 401(k) investments.  But they don’t have to stay there for long, if they are willing to do the research themselves.  401(k) plan holders have access to a variety of resources online that offer free comparisons between the fees of different providers.  This knowledge, plus a discussion with other workers to compare account statements amongst each other, can help hold those companies accountable for making a decision that supports their employees.

They say ignorance is bliss, but in the case of 401(k) plans, ignorance is costly.  Employers aren’t sufficiently motivated to put in the work in understanding the fees involved, so the burden shifts to those who are paying the price.  The government is taking steps to help where they can, but for those workers blindly throwing their hard earned money into a 401(k), it’s time for them to open their eyes and see where their money is going.  They owe it to themselves and their future.
http://www.gao.gov/assets/600/590359.pdf

Photo courtesy of oneretirement.com

Read Full Post »