Retirement Planning: Common 401(k) mistakes – and how to avoid them.
Retirement Planning: So often we overestimate what can be done overnight and we underestimate the compounding value in small decisions over time. As we project, approach, and walk through retirement, there are many forks and paths to take. It can be both overwhelming and confusing. But even more dangerous is the idea that we can shrug it off due to the fact that it is simply not “right now.”
While there is a lot to navigate, it can be done by availing Retirement Planning Services in a methodical way by making one informed decision at a time. This means avoiding a lot of cliches, trends, and misconceptions floating across your screen or in social circles. Retirement success is composed of many small well-informed decisions. Let’s break down some of the common misconceptions and wrong-side-of-the-fork decisions we see as wealth advisors!
“Roth contributions are best in your 20’s”
Often people fall into the trap of electing Roth contributions simply because of an article they read or a friend/coworker that told them how great Roth IRAs are for them. The truth of the matter is Roth IRAs (and 401(k)s) are not a one size fits all type of vehicle. Before you click that button to change your contributions to Roth, pause and assess to see if it is right for you.
What should you evaluate?
- Consider your marginal income tax bracket in your current tax year vs. your retirement years when you will withdraw from the account.
- Consider your time horizon. Will you be able to leave the funds invested long enough for them to recoup the amount paid in taxes?
If either of these options seem confusing, you’re not alone. While IRAs and 401(k)s can certainly be managed by an individual, bringing in a professional financial planner to help sort through questions like this will provide you with the best strategy for your specific situation.
“I can trade as often as I like in my account”
With the drastic market swings experienced in 2020, many traders found themselves buying and selling more than normal, either to take advantage of opportunities or curb risk exposure. A common error made by participants in retirement plans involves what is called the excessive trading policy which limits participants from buying and selling the same fund within a 30-day window. There are two ways this is often miss interpreted by participants:
- “I should not place a trade because I’m worried that I may change my mind and I cannot trade again for 30 days.”
- “I placed a trade and now I am stuck and cannot change again for 30 days.”
The 30-day restriction is put in place to discourage excessive trading in and out of funds. This does not restrict you from trading completely as you are able to trade into other funds within your retirement plan platform. It is important to note that not only can you still trade within the 30 days but that you can get back into similar strategy funds. For example, maybe you sold out of a US Large Cap Growth fund within the last 30 days, and you want to get back into that sector. Consider purchasing a US Large Cap Index fund as a replacement until the time requirement has been attained.
“Index funds are always best”
Index funds are attractive in that they are low cost and allocated to closely mirror the S&P or other market index. However, equity index funds are often over-utilized in retirement portfolios. We often find individuals with an over-exposure to risk as they enter their retirement years. Many of the retirees with this over-exposure hold equity index funds. It is highly recommended to assess your risk tolerance in coordination with your account drawdown needs as you approach and navigate through retirement. The purpose is to maintain market growth participation while minimizing the downside risk of selling to provide for cash flow needs in a correction or bear market. Taking Retirement Planning Services from a trusted retirement financial advisor can help you create a risk tolerance plan to guide your investment decisions as you near and walk-through retirement.
“I have a few previous employer retirement plans and have no clue what they are invested in”
Unfortunately, we hear this far too often. Just because you are not retired yet does not mean your contributions must remain in that 401(k) or retirement plan. A common misconception is that one 401(k) or retirement plan is the same as the rest. This is incorrect as retirement plans are not universal in many of their rules and policies. Once you have terminated employment, you are free to move the assets by way of a direct rollover (within 60 days) without penalty or tax. You do not have to keep your funds in your previous employer plan. Even if your previous employer plan was low-cost and seems like a great retirement plan, that does not mean it should remain there based on your current situation. Consider a direct rollover to your current employer plan if they allow or a direct rollover to an IRA. You will want to assess the custodian, fee structure, list of funds available, and the flexibility of distributions (Roth conversions, QCDS, and pre-retirement distributions).
“My employer match is confusing”
One common employer 401(k) structure we see is that they will match every dollar up to 3% and then .5 up to 5%. In other words, if you contribute 5%, they will contribute 4%. Another common match is a straight 3% or 50% match up to 6%. One of, if not the most, important thing you can do for your retirement is to utilize your employer’s entire match. It is free money and incentive for you to contribute toward your financial future!
Keep in mind that even if you are putting all of your money into a post-tax Roth 401(k), your employer’s match will go into the pre-tax 401(k) bucket (your employer may be nice but they aren’t going to pay your taxes for you!).
“I can tap my 401(k) for a low-to-no cost loan”
Understand that the true cost of your loan goes beyond the amount borrowed and interest rate. You are forgoing the growth of those funds were you to remain invested. The success of this loan will be dependent on the market performance during the term of the loan. This is a great situation to discuss with your retirement financial advisor before pulling the trigger.
“I can’t use or withdrawal my funds until I retire”
Many retirement plans have what is called in-service-distributions allowing for participants to withdrawal funds while they remain employed upon reaching a designated age (see your plan document for further details) normally age 59 ½.
Retirement Plan Summary
As retirement financial advisors, we cannot stress enough how important the steps you take today are for your planned retirement. As you can see, there are many influential wealth management decisions that significantly impact what your retirement lifestyle will look like. Not all advice pertains to all individuals. Retirement Planning Services can help you make informed decisions based on your specific financial picture and outlook. We would be happy to talk to you about how to maximize your benefits while protecting your assets, to better prepare you for your retirement journey! Call Tull Financial Group today at 757-436-1122 to set up your in-person or virtual consultation today.