Thursday, September 8, 2016
The Ten Commandments Of Personal Finance by Fritz
The Ten Commandments Of Personal Finance
Posted on November 18, 2015 by fritz@theretirementmanifesto.com
Is it possible that there are some basic principles upon which your personal finance journey should be built? It turns out there are. I’ll warn you in advance – you may not like some of them. Just as THE Ten Commandments guide us away from our personal nature which is sometimes tempted to do things which seem fun at the time, but lead to long term harm, these “Personal Finance Commandments” can guide you away from doing things which will bring harm to your long term financial goals.
In full transparency, I didn’t come up with the original list. That honor goes to this article from MoneyStepper, which I just read tonight. I liked the concept and the guidelines presented so much, I’ve decided to build on the original article with original thoughts of my own, including the “10 Commandments” title. In my quest to “Help People Achieve A Great Retirement”, I think there’s a lot of room to share some of the best concepts I come across in my heavy reading on personal finance topics. This one’s a good one, and worth my effort to build upon the concept.
Strive to achieve as many of these commandments as you can, and you’ll be well on your way toward financial independence. Break them, and suffer the consequences.
The 10 Commandments Of Personal Finance
I. Keep Your Housing Costs Under 25% of Your Net Income
Personally, I like these “rule of thumb” guidelines to help you decide how much of something you can afford. When you’re shopping with a realtor, or talking to a banker, they often attempt to “stretch” you to a ratio that’s higher than you should really undertake. So, look at your last paycheck. How much went into your bank account? If you rent, your rent should be less than 25% of your monthly NET pay (after taxes). Ditto on your mortgage payment. If you’re spending more than the 25% “commandment”, consider downsizing, or seek out a job with higher pay.
II. Keep Your Mortgage Under 2.5 Times Your Annual Salary
Interesting that the first two “Commandments” focus on housing costs. Appropriate, given the cost of the roof over your head is the highest expense you’ll incur in your personal finance journey. Manage it carefully, and don’t buy “too much” home. If you’re making $50,000/year, your home should be worth $125k or less.
III. Don’t Buy A New Car Unless You’re A Millionaire
I LOVE this one. Bottom line: buying a new car is stupid (yes, I said Stupid!). It depreciates immediately, and it’s expensive. It’s one of the worst personal finance decisions you can make. Don’t “Buy New”! After a few months, it’s “just a car”. Within a few years, if you’re like most people, you’re “itching” for another one. AVOID the materialism – focus on the function. My wife and I have bought used cars for years, and paid cash for all but our first one. We bought her last car new (a 2012 Hyundai Sonata for $25k), but I’ve told her she can’t sell it until it has over 200,000 miles on it. Oh the fun we have on this topic. Yes, this one is a HOT button for me. Don’t let Madison Avenue talk you into a mistake. Here’s a challenge for you, which I’ve accomplished with several of my cars:
“$1,000 PER YEAR”
Depreciation, that is. Make it a personal goal. Think on it. If you buy a $20,000 car and sell it in 3 years, you’d have to sell it for $17,000 to achieve this goal. It can be done, I’ve done it twice (most recently with my 2002 Miata, which I bought for $12,000, and sold it 6 years later for $7,000). It’s really, really hard, but it helps you keep your car expense where it should be – MINIMIZED!
IV. Maintain A Savings Rate of 20% or More
I know, I know. You have a million reasons…… Get over it. When you get your next pay raise, divert the majority of it to savings. For example, if you get a 3% raise, increase your savings rate by 2% ON THE SAME MONTH that your pay increase hits your paycheck. You’ll never miss it, and within a few short years you’ll be over 20%. With pensions gone the way of the dinosaurs, and Social Security anything but secure, it’s critical you save at the 20% level to have a realistic chance of a “normal” retirement. Or, you can keep making excuses. Don’t say you haven’t been warned when you’re 70 years old and fearing for how you’re going to live on your meager savings. Do it now, while you still have time. You’ve been warned. Again. Getting the hint?
V. Earn A Minimum Of 5% On Your Net Worth
This is a new one, and my compliments to MoneyStepper for the concept. He argues that you should look at the return on all of your assets (including home value) and strive to achieve a minimum of 5% return. This is necessary to grow your savings into a large enough asset pool to offset inflation and provide the income you’ll need in retirement. The takeaway for me – keep your assets widely diversified, and don’t get in the trap of “too much in cash” beyond your 6 month emergency fund. You must earn a higher return than is possible on fixed income investments to grow your assets at the rate they must grow to reach your objectives.
VI. Think Before You Act
I’ve modified MoneyStepper’s rule, which read “consider every financial decision carefully via an investment analysis”, to a simplified “Think Before You Act”. Personally, I think the use of “investment analysis” scares people off, and it’s not necessary to make the point of this Commandment. The point here is to realize that your longer term personal finance success is nothing more than a long journey of little steps, every day. Don’t make spontaneous decisions on topics related to money (see Commandment III above), but realize that every decision you make has a long term impact. I’m a big fan of annual Net Worth tracking, as it gives you a nice way to see the results at least once a year from all of the little decisions you made during the year.
VII. Pay Off Your Highest Debt First
Make getting out of debt a huge focus. One could argue whether it’s best to pay off your “Smallest Debt” first (Dave Ramsey’s “snowball” method) or your “Most Expensive” debt first. Viewed strictly from a financial perspective, you’ll come out further ahead if you tackle the most expensive debt first. From a motivational perspective, the “smallest first” may be more encouraging. The point is: attack debt, and attack it HARD. It’s the fiercest enemy of your longer term financial goals (right up there with Procrastination!).
VIII. If It’s Not In The Budget, Don’t Buy It
Yes, that means you need to have a budget. A friend and I have had this discussion, and he believes if you’re saving more than 20% of your pay you don’t need a budget (as long as you’re not in debt). His logic – you’re saving 20% and you’re debt free. You don’t need to micro manage as long as you don’t spend more than the 80% remaining after your savings. I’ll give him that. Using the same logic, if you’re NOT saving 20% or more, or you’re in debt, you need a budget. If you’ve never done one, try it for one month. The purpose of the budget is to avoid making mistakes in your discretionary spending, which is exactly the point of this Commandment.
IX. Never Go Shopping Without A List
We’ve all been there, right? This one works. Make it a habbit, and only buy the items on the list!
X. Always Think In Terms Of Hourly Value
The MoneyStepper author uses this rule to guide you on what you should hire others to do. If you can make $20/hour working, but instead you spend an hour mowing your yard that you could pay the neighbor kid $10 to complete, pay the kid. I have a bit of a different opion on this one. You should only pay the kid if you WILL work the extra hour making $20 instead of mowing the yard. If it’s a choice between watching TV and mowing the yard yourself, mow it yourself. You just made $10 more by investing your time instead of paying the kid. Also, I think it’s helpful if you think of items you’re considering purchasing in “Hour Terms” instead of “Dollar Terms”. If you think about how much work it took you to pay for something, you may be just a bit more hesitant to open your wallet buying yet another thing you really don’t need.
So, there you have it. 10 Commandments For your Personal Finance. See how many you can apply in your own life. The next time you’re facing a money decision that falls within these commandments, stop and think. If you do that, the past 2 hours of my life spent writing this will have been invested wisely.
Make me proud.
5 Things Rich People Do With Their Money by Fritz
5 Things Rich People Do With Their Money
Posted on July 19, 2016 by fritz@theretirementmanifesto.com
Do you think you can learn something from rich people? How much do you know about them? Have you studied their habits to see what you can learn? Do you think they inherited most of their wealth? (They didn’t. In fact, only 10% inherited their wealth). Did they start on their paths toward financial responsibility earlier than most? (They did, with the average wealthy person starting to save by the age of 14).
What are the top 5 things rich people do with their money? Are there common themes which could benefit you if they were applied in your own life? Today, we’ll review some interesting traits of wealthy people.
5 Things Rich People Do With Their Money
I read an interesting survey this week from US Trust, which covered 684 high net worth investors, with at least $3 Million in investable assets. There are some very interesting findings in the survey, which is my focus for today’s article. There are, indeed, some very common traits among these folks. All of us could benefit from studying their habits and applying them in our own lives.
Rich folks have some common traits regarding their finances. How many can you apply yourself? CLICK TO TWEET
Here, then, are the top 5 common traits regarding how rich people manage their money. Think about which ones you already do, and attempt to apply a few that you don’t.
1. They Start Early
start early
According to the US Trust study, a common trait among the wealthy is the fact that they had parents who instilled a strong sense financial responsibility at an early age. The average wealthy person began saving at Age 14, began working for money at Age 15, started charitable giving (time or money) by the Age of 23, and started investing in the stock market by Age 25.
I started working (and saving) when I was 10. In elementary school, I started shoveling driveways in the neighborhood, and got my first “real job” (a paper route) at age 13. I saved diligently, and had several thousand dollars in my savings account by the time I graduated from high school. Clearly, my parents instilled the work/thrift ethic in me, and my wife and I have worked to instill it in our own daughter.
2. They Delay Gratification
delay gratification
I had a discussion during lunch with a financial planning friend last weekend, where we discussed the single most important attribute required for wealth creation. We both agreed that delaying gratification is likely one of the most important things within our control for creating wealth. (By the way, my friend’s name is Ed Wolpert, and he’s written 3 books on personal finance. Have a look here).
Apparently, the wealthy feel the same way about delaying gratification, with 80% of them saying that investing in long-term goals is more important than funding current wants and needs. As I explained to my daughter when she expressed a desire for a motorcyle, if you want to build wealth you need to save the money first and buy things you WANT in cash. It helps you delay your gratification, and insures your money works for you (instead of the other way around).
3. They Focus Their Investments On Buy-And-Hold
buy and hold
In spite of significant wealth, 85% of high-net worth investors say they made their biggest investment gains through long-term buy and hold strategies. Rather than being savyy day-traders, they automate their savings month in and month out, and gradually watch their net worth grow. They keep their investments simple, with 89% using a traditional buy and hold approach in mostly stocks and bonds.
In addition, the wealthy maintain cash reserves, with 54% of them holding at least 10% of their portfolios in cash. They also invest in tangible assets, with roughly half of high net worth investors owing real estate or farmland that produces income and appreciates over time. Compare this to the “average” person, who borrows an average of $30k on a 68 month loan to buy a new car, which depreciates immediately. Smart? Not.
4. They Are Charitable
Charity
Wealthy folks share a common trait of feeling a deep commitment to give back to society. 74% donate their money, 61% volunteer their time, and 47% serve on boards. They find a way to contribute to others, which is counter to the stereotype so often attributed to the wealthy.
As I wrote in “No One Has Ever Become Poor By Giving”, generosity brings unexpected rewards to the giver. The wealthy have discovered that reality, and most do not hoard their wealth.
5. They Manage Their Own Destiny
destiny
Whether the wealthy gained their riches via private business or corporate roles, they all agree that owning a business is a path to greater wealth than working for someone else. I read a lot, and there are dozens of articles like this one that point to the reality that entrepreneurship is the surest way to real wealth. It can be a difficult path, however, as 70% of the wealthy who are business owners agree that it’s more challenging than just “having a job”. Regardless, 80% still prefer to run their own business, demonstrating their motivation to take control of their own destiny. The wealthy work hard, and often make sacrifices. 71% say work responsibilities take priority over personal needs. Think about what you really want in life before you pursue wealth, there are tradeoffs.
Summary
Wealthy people share some common themes in how they manage their money. I don’t know whether it’s cause or effect, but the principles outlined above have been proven time and time again to be fundamental building blocks for wealth creation. Yet again, this survey by from US Trust proves these principles are critical, and followed by a majority of people with significant wealth.
How about you?
How many of the items on the list above are apparent in your life? Are there a few that you can begin applying to your personal situation? Work toward implementing all 5 in your personal finances, and you’ll be well on your way to…
Friday, August 19, 2016
New College Financial Aid Program Aims to Get Students Jobs, Not Debt
Consumer Reports Tue, Aug 16 5:27 PM PDT
The Obama administration is tackling two key problems in higher education today: Too many students go into debt to get a college degree, and too few land a job that puts their expensive education to use.
Today, the Department of Education announced a pilot program, the Educational Quality Through Innovation Partnerships (EQUIP), that for the first time will give federal financial aid to students enrolled in nontraditional education programs, such as coding boot camps, online courses and corporation-based training initiatives.
The aim is to give more students the chance to get trained for in-demand jobs quickly and affordably. In its pilot phase, the financial aid initiative will give up to $17 million in grants and loans to students enrolled in eight programs that have been preselected. The programs are partnerships between public universities and less-traditional education providers. All provide students protections, including refunds if they don’t get jobs after completing their training.
Training Future Engineers and Managers
EQUIP programs, which are largely focused on providing skills needed for high-tech jobs, include:
Colorado State University Global Campus and Guild Education. A one-year certificate program in management and leadership fundamentals aimed at helping students move from low-wage jobs into supervisory roles.
Marylhurst University in Oregon and Epicodus. A 27-week certificate program in web and mobile software development for low-income students to get jobs requiring computer software coding skills.
Northeastern University and General Electric. An accelerated bachelor’s of science in high-tech manufacturing, initially only open to GE employees who will do their training at a GE jet-engine manufacturing plant.
University of Texas Austin and MakerSquare. A 13-week computer-programming course to prepare students for mid-level software engineer jobs.
The programs target lower income and nontraditional students who are either older, go to school part-time or want to update their skills mid-career.
“In too many cases, low-income students have been unable to get the training they need because they don’t have access to financial aid to pay for them," Under Secretary of Education Ted Mitchell said in a press briefing. The ability of people to get jobs after doing the training is critical, he added. “It’s not enough to measure access and enrollment. We need a laser focus on outcomes.”
In the next decade, 11 of the 15 fastest growing occupations will require some kind of post-high school education.
New Model of Education Welcome but Not a Cure All
Consumer advocates applauded the move.
“It's no secret that there are skilled jobs in the U.S. that employers are having a hard time filling—and that online education and training has a role to play more broadly in expanding access to learning opportunities,” said Suzanne Martindale, a staff lawyer at Consumers Union, the policy and mobilization arm of Consumer Reports, who focuses on higher education issues.
The financial aid program comes as a growing number of people question the cost of higher education. Today a four-year education at a state school—including tuition, fees, and room and board—costs an average of $78,000; at a private university, it’s more than double that. More than 70 percent of graduates leave school with debt. And it's wreaking financial havoc on their lives.
A Consumer Reports nationally representative survey (PDF) of more than 1,500 student loan borrowers found that 44 percent of those who've left college say they have had to cut back on daily living expenses, and 28 percent have had to delay major goals like buying a house, and 37 percent put off saving for retirement. The financial impact is so daunting that 45 percent of borrowers say knowing what they know now, their college experience was not worth the cost.
The EQUIP programs aren’t a cure-all, said Martindale.
“They won't be the right fit for everyone—not everyone is going to be a software engineer,” she said.
It's important that these programs remain affordable, "especially if they recruit from low-income communities, so that if a program doesn't work out for the student she isn't stuck with a ton of debt at the end," she said.
The financial aid programs will start rolling out early next year. The institutions are in the process of setting them up and getting final approval from the Department of Education. Mitchell estimates about 1,500 students will enroll in the first year.
7 degrees, no student loans, and 5 years of savings
BY KATHLEEN ELKINS WITH BUSINESS INSIDER
Justin Hall and Tina Hanisch, both 29, invested a lot of time in their education.
Hall received a bachelor's degree, two associate's degrees, and a master's degree, while Tina earned two bachelor's, an associate's, and is slated to complete her master's in two years, which will up their degree count to eight.
Their education came with a hefty price tag of $206,000. They whittled that sum down to $68,000, and paid it without taking out any student loans.
What's more, through diligent saving and creative strategies, Hall and Hanisch—who are not married—have saved enough money that they could choose not to work for the next five years. Their impressive savings were an indirect result of living below their means and keeping expenses at a minimum.
"Neither of us can sit still, so not working is out of the question," Hall, who works in financial services, tells Business Insider. Hanisch is a registered nurse and works when she's not taking classes or studying.
"Being financially responsible is more about the opportunities versus not having to work. We want the ability to take more risk, to try new things, and to experience life in ways you normally couldn't."
Here's how they covered $206,000 worth of education and set themselves up for several years of financial independence.
1. They Took Advantage of Company Programs and Scholarships to Cover Tuition.
While their education amounted to $206,000 total, they only had to cover $68,000 out-of-pocket. The remaining $138,000 was paid for in scholarships ($65,000) and through company programs offered by their employers ($73,000).
"There is so much money available to students who take a proactive approach to finding it," Hanisch tells Business Insider. "Being proactive was one of the key factors to my success. Every night I religiously sifted through online scholarship websites and local college funding programs for opportunities. I also stayed in constant communication with my [undergrad] school adviser, as they have up-to-date information about new or upcoming scholarships that you can apply for."
2. They Made Smart Investments.
One of Hall's smartest investments was a home he purchased in 2008 with three partners. They proceeded to flip it later that year and earn a profit. At the time, he was completing his associate's degree from Mesa Community College.
While a risky investment, he had the funds to invest in flipping the house because he was working two jobs while in school.
"You always have a little fear in the back of your mind about potential risks," he tells us. "But in reality that fear is actually a tool that keeps you on your toes; it helps you stay on budget during renovations and it helps you overcome problems."
Another major investment vehicle for Hall is the stock market. "I usually focus on five to 10 stocks for long-term investing. Since I do not trade for a living, I try to manage a smaller portfolio," he explains. "One of the benefits of being young is that you are able take more educated risks and still have time to secure your financial future if you fail," he says.
3. They Didn't Drain Their Savings to Buy a House.
In 2011, Hall and Hanisch opted out of buying a new home together, and purchased a $60,000 fixer-upper in Mesa, Arizona instead. They've since put in $20,000 of renovations and completely remodeled the home without hiring a contractor and relying on help from family instead.
They estimate they could sell it today for more than double the amount of money they put into it—for roughly a 125% return on their investment, Hall says.
They were strategic when it came to buying their home. They bought it at a good time, when prices were still fairly low following the market crash of 2008, and they paid all cash. Not having a mortgage and interest payments provided emotional and financial freedom, Hall says. They were able to spend money on significant renovations to make the home their own, and never felt financially stressed about making payments.
4. They Created a Joint Account and Maximized Credit Card Rewards.
Right before buying their fixer-upper, the couple created a shared account and opened a credit card to split joint costs like utilities, food, and other necessities. "All costs are run through our credit card, which gives us 1.5% cash back, so we basically get paid to pay our bills," Hall tells us.
One month, he explains, they had to pay several thousand dollars on home and car repairs, but it resulted in about $550 cash back, which they will either put back into their joint account or use towards a vacation.
While they set up a joint account for certain costs, Hall and Hanisch also maintained their own accounts, which has allowed them freedom to spend their own money as they please and prevented financial disagreements.
They each put 10% of their earnings into the joint account, 10% into their 401(k)s, and 5% towards charitable donations. Hanisch allocates 30% of her earnings for personal expenses and 45% for savings, while Hall puts 20% of his monthly earnings towards personal expenses, 40% towards investments, and 15% towards savings.
5. They Made Sacrifices In Order to Live Below their Means.
"Tina and I both lived below our means throughout school," Hall tells us. "There were times when we did not go on vacation, nor go out with friends or family. Instead we worked, studied, and saved. We really took the concept of 'live a few years of your life like most people won't so you can live the rest of your life like most people can't' to heart."
Some of the bigger sacrifices included working throughout college and post-grad programs, and living with family until buying their fixer-upper.
They're reaping the benefits today, and have exciting opportunities on the horizon. "We have an opportunity now where we can decide where we want to go," Hall explains. It will likely be California, where Hanisch could finish her master's online, but they're still deciding. "And I want to start my own business," Hall says. "With this financial freedom, I’m choosing to go that route."
"We're going to take more risk now, step outside of our comfort zone, and travel more," he continues. "We're going to try to experience things differently. Instead of just saving, we're going to invest, experience life, and enjoy it now that we've put in the hard work."
Wednesday, January 4, 2012
Retirement Plan Changes in 2012 by Robert Powell
Retirement-Plan Changes Coming in 2012
By Robert Powell | MarketWatch – Tue, Jan 3, 2012 3:08 PM EST
Even though lawmakers may shy away from passing major laws in an election year, 2012 will bring changes to 401(k)s and other retirement plans.
From fee disclosure to lifetime-income options and more, your 401(k) or other workplace plan likely will look different by this time next year.
Still, experts say there won’t be many legal or regulatory changes in 2012 given that it’s an election year. “Given the fiscal situation, there is certain to be a quite long political debate over the question of entitlement reform, which includes Social Security and Medicare,” said Stephen Utkus, a principal with the Vanguard Center for Retirement Research.
“No one really envisions major changes in 2012, given that it is an election year,” Utkus said.
Others agree. “Not much will happen in Washington,” said Stacy Schaus, a senior vice president with PIMCO.
But even absent new laws, your retirement plan may see changes.
Fee disclosure
The year 2012 should largely be about enhanced disclosure, said Lew Minsky, the executive director of the Defined Contribution Institutional Investment Association.
For instance, retirement-plan sponsors will have to disclose to 401(k) participants the fees and expenses associated with the funds in their retirement plan.
That includes new annual notices, quarterly statements, enrollment workbooks and education about fees. Read more: New directions for 401(k)s: A MarketWatch Retirement Adviser Special Report.
“The materials are mandated under new regulations and are intended to make it easier for participants to understand their retirement-plan investment choices by providing information about such things as past performance, benchmarks and fees in a comparative chart,” said Larry Goldbrum, general counsel at the SPARK Institute.
Such fee disclosure may not change participant behavior as intended, however, said Michael Falcon, managing director and head of retirement in the U.S. and Canada for J.P. Morgan Asset Management. Learning that a fund costs 45 basis point is interesting math, but the most important way to change outcomes is to change how much you save. “The savings rate is the most important element of a retirement plan, not the fees,” he said.
Lifetime income options and illustrations
There are those who hope, or expect, that regulators and lawmakers will make progress on other initiatives.
Howard Heller, manager of legislative and regulatory strategy for T. Rowe Price Retirement Plan Services, said he expects the U.S. Labor Department to issue guidance in 2012 on providing lifetime income illustrations on participant benefit statements.
The illustrations would show participants their expected monthly benefit at retirement age given their current account balance and, perhaps, give certain assumptions regarding future contributions and earnings. T. Rowe Price research suggests that plan participants value such information, he said.
Schaus also said she hopes to see the Lifetime Income Disclosure Act or LIDA, which was proposed in 2010, become law. Read LIDA at this website. She also hopes the U.S. Treasury Department will issue guidance on deferred annuities within defined-contribution plans, especially as it pertains to required minimum distributions.
Fiduciary investment advice
Also on the docket: The Labor Department has said it plans to re-propose its rule on the definition of a fiduciary for the purposes of giving investment advice.
“It is very difficult to say what the impact would be on savers at this time without seeing the final rule,” said Terri Hale, a spokeswoman for the Principal Financial Group. “We are hoping any re-proposal is a workable regulation that protects retirement-plan participants, IRA account holders and employers, while ensuring they continue to have access to the much-needed investment information and services they receive today.”
But Heller said the timing of the fiduciary proposal makes it unlikely that it will be finalized by the end of President Obama’s current term, which raises the possibility of the regulation being modified once again should Obama not serve a second term.
“Some have expressed concern with the current proposal in that it would have unintended consequences and limit the ability of plan sponsors to obtain the information and support they have come to expect from their service providers, such as information relating to the investment options on a recordkeeper’s investment platform and information provided to participants regarding their rollover options,” Heller said.
Auto-everything
The Labor Department’s guidance on lifetime-income illustrations will lead to greater focus on outcome-oriented approaches to retirement-plan design and management, some say.
“As such, I expect to see increased use of auto features (particularly auto escalation) to drive increased savings rates,” said Minsky, of the Defined Contribution Institutional Investment Association.
Others agree. “I do think auto-enrollment and auto-escalation will become very common,” said Craig Brimhall, vice president of retirement wealth strategies at Ameriprise Financial.
In these types of plans, new employees are automatically enrolled in the plan, for example at a 3% contribution rate, and that rate is automatically escalated a certain percentage each year until it reaches the maximum, unless employees opt out.
Another point of view
Meanwhile, others say that many of the regulatory and legislative changes that may occur are largely distractions for investors saving for retirement.
“Ultimately investors should keep their eye on the long-term goal of accumulating a large enough nest egg to create sustainable retirement income,” said Josh Cohen, defined-contribution practice leader at Russell Investments.
New in-plan income options
Minsky also expects to see large plan sponsors begin to follow the example set by United Technologies Corp. and look at ways to build lifetime income solutions into the default investment vehicles within their plans. United Technologies recently became the first Fortune 100 company to offer a lifetime income annuity as an investment option inside its 401(k) plan.
Others agreed. “I would expect to see more product options for employers who want to encourage and facilitate life income and a continued focus on the part of mutual funds on retaining dollars after people retire or terminate employment,” said Anna Rappaport, president of Anna Rappaport Consulting and a member of the Society of Actuaries’ Retirement 20/20 Advisory Panel.
Meanwhile, David Wray, the president of the Plan Sponsor Council of America, sees a different trend with 401(k) investment options. Plan sponsors will fewer choices, more target-date funds, and more passive funds in 2012, he said.
New products
Experts say that in 2012 financial-services firms will focus more on selling products more suitable for the times. “There will be an increased interest in strategies that offer lower volatility and guards against market shocks,” said Schaus. And more investment will go to emerging markets and inflation hedging such as commodities and real estate, she said.
Goldbrum said there will be continued focus on lifetime income products. “Lifetime income annuity options and other products and services will continue to be a focus as plan participants, especially baby boomers nearing retirement, employers and the retirement-plan community try to help workers figure out how to construct a reliable retirement income stream,” he said.
“Most of the momentum on this will come from product and service providers but regulators may adopt rules that would require employers to provide lifetime income illustrations or examples on participant statements,” he said.
Wray also suggested that 401(k) plan participants should keep an eye on stable-value funds, one of the more common investment options in a 401(k) plan.
“Eventually these extremely low interest rates could impact its viability,” he said. “Stable value is expensive on its face because you have to include the cost of the guarantee. If interest rates are zero for five-year bonds, that's a problem.”
New strategies
Brimhall suggested you would be wise to consider tax diversification in 2012, “especially in light of uncertainty around future tax rates.” He recommends putting assets in each of the three types of accounts — tax-free, tax-deferred and taxable — so you have the “maximum flexibility to respond if tax rates change.”
Pre-retirees who are quite confident that they will stay in the upper tax brackets, and who believe taxes will continue to rise, may consider putting more of their savings into tax-free accounts, like Roth IRAs,” Brimhall said.
“The higher taxes go, the more valuable tax-free income becomes,” he said.
Couples who don't qualify for a contributory Roth IRA because their income is too high may still consider contributing to a traditional non-deductible IRA and then converting it, Brimhall said. “Since the traditional non-deductible IRA was bought with after-tax dollars, the only thing taxable upon a conversion would be any gain since the IRA was contributed to,” Brimhall said.
Of course, there are some accounting pitfalls to be aware of — the IRS's pro-rata rule among them — so this idea should not be implemented without careful consideration by a tax professional beforehand, he said.
Also, Hale noted that in 2012 the oldest of the baby boomers reach age 66, making them eligible to receive their full Social Security benefit, if they haven’t already elected it.
“Some may want to consider delaying longer if they have the financial resources,” she said. “Every year they delay up to age 70, they will receive a guaranteed 8% boost in the form of delayed credits.”
Entitlement reform on hold
Pat Connor, a spokesman for MetLife, said he agreed that comprehensive tax and entitlement reform most likely will be put off until 2013, though there is a small chance of seeing something in 2012.
“On the retirement front, when tax reform does happen, we will likely see a cap on contributions to plans and/or a consolidation of plan types (401(k), 403(b) and 457 plans),” he said.
Brimhall and others said Congress may reduce spending at some point, and that could affect Medicare beneficiaries. “Medicare part B premiums are now ‘means tested’ and the premium for higher income folks can be three times that of the lower income,” he said.
“If Congress moves forward with entitlement reform, more means testing will probably come into play. Therefore, those in the higher brackets may need to plan on paying a larger and larger share of their premiums and maybe even co-insurance amounts.”
Other trends
Employers and employees both are going to be frustrated because employees at or near retirement age cannot afford to retire, said Rappaport.
“They will want to stay and it may create talent management challenges,” she said.
In addition, she warned that as more people see retirees struggling, “there will be growing awareness of the challenges of retirees.”
By Robert Powell | MarketWatch – Tue, Jan 3, 2012 3:08 PM EST
Even though lawmakers may shy away from passing major laws in an election year, 2012 will bring changes to 401(k)s and other retirement plans.
From fee disclosure to lifetime-income options and more, your 401(k) or other workplace plan likely will look different by this time next year.
Still, experts say there won’t be many legal or regulatory changes in 2012 given that it’s an election year. “Given the fiscal situation, there is certain to be a quite long political debate over the question of entitlement reform, which includes Social Security and Medicare,” said Stephen Utkus, a principal with the Vanguard Center for Retirement Research.
“No one really envisions major changes in 2012, given that it is an election year,” Utkus said.
Others agree. “Not much will happen in Washington,” said Stacy Schaus, a senior vice president with PIMCO.
But even absent new laws, your retirement plan may see changes.
Fee disclosure
The year 2012 should largely be about enhanced disclosure, said Lew Minsky, the executive director of the Defined Contribution Institutional Investment Association.
For instance, retirement-plan sponsors will have to disclose to 401(k) participants the fees and expenses associated with the funds in their retirement plan.
That includes new annual notices, quarterly statements, enrollment workbooks and education about fees. Read more: New directions for 401(k)s: A MarketWatch Retirement Adviser Special Report.
“The materials are mandated under new regulations and are intended to make it easier for participants to understand their retirement-plan investment choices by providing information about such things as past performance, benchmarks and fees in a comparative chart,” said Larry Goldbrum, general counsel at the SPARK Institute.
Such fee disclosure may not change participant behavior as intended, however, said Michael Falcon, managing director and head of retirement in the U.S. and Canada for J.P. Morgan Asset Management. Learning that a fund costs 45 basis point is interesting math, but the most important way to change outcomes is to change how much you save. “The savings rate is the most important element of a retirement plan, not the fees,” he said.
Lifetime income options and illustrations
There are those who hope, or expect, that regulators and lawmakers will make progress on other initiatives.
Howard Heller, manager of legislative and regulatory strategy for T. Rowe Price Retirement Plan Services, said he expects the U.S. Labor Department to issue guidance in 2012 on providing lifetime income illustrations on participant benefit statements.
The illustrations would show participants their expected monthly benefit at retirement age given their current account balance and, perhaps, give certain assumptions regarding future contributions and earnings. T. Rowe Price research suggests that plan participants value such information, he said.
Schaus also said she hopes to see the Lifetime Income Disclosure Act or LIDA, which was proposed in 2010, become law. Read LIDA at this website. She also hopes the U.S. Treasury Department will issue guidance on deferred annuities within defined-contribution plans, especially as it pertains to required minimum distributions.
Fiduciary investment advice
Also on the docket: The Labor Department has said it plans to re-propose its rule on the definition of a fiduciary for the purposes of giving investment advice.
“It is very difficult to say what the impact would be on savers at this time without seeing the final rule,” said Terri Hale, a spokeswoman for the Principal Financial Group. “We are hoping any re-proposal is a workable regulation that protects retirement-plan participants, IRA account holders and employers, while ensuring they continue to have access to the much-needed investment information and services they receive today.”
But Heller said the timing of the fiduciary proposal makes it unlikely that it will be finalized by the end of President Obama’s current term, which raises the possibility of the regulation being modified once again should Obama not serve a second term.
“Some have expressed concern with the current proposal in that it would have unintended consequences and limit the ability of plan sponsors to obtain the information and support they have come to expect from their service providers, such as information relating to the investment options on a recordkeeper’s investment platform and information provided to participants regarding their rollover options,” Heller said.
Auto-everything
The Labor Department’s guidance on lifetime-income illustrations will lead to greater focus on outcome-oriented approaches to retirement-plan design and management, some say.
“As such, I expect to see increased use of auto features (particularly auto escalation) to drive increased savings rates,” said Minsky, of the Defined Contribution Institutional Investment Association.
Others agree. “I do think auto-enrollment and auto-escalation will become very common,” said Craig Brimhall, vice president of retirement wealth strategies at Ameriprise Financial.
In these types of plans, new employees are automatically enrolled in the plan, for example at a 3% contribution rate, and that rate is automatically escalated a certain percentage each year until it reaches the maximum, unless employees opt out.
Another point of view
Meanwhile, others say that many of the regulatory and legislative changes that may occur are largely distractions for investors saving for retirement.
“Ultimately investors should keep their eye on the long-term goal of accumulating a large enough nest egg to create sustainable retirement income,” said Josh Cohen, defined-contribution practice leader at Russell Investments.
New in-plan income options
Minsky also expects to see large plan sponsors begin to follow the example set by United Technologies Corp. and look at ways to build lifetime income solutions into the default investment vehicles within their plans. United Technologies recently became the first Fortune 100 company to offer a lifetime income annuity as an investment option inside its 401(k) plan.
Others agreed. “I would expect to see more product options for employers who want to encourage and facilitate life income and a continued focus on the part of mutual funds on retaining dollars after people retire or terminate employment,” said Anna Rappaport, president of Anna Rappaport Consulting and a member of the Society of Actuaries’ Retirement 20/20 Advisory Panel.
Meanwhile, David Wray, the president of the Plan Sponsor Council of America, sees a different trend with 401(k) investment options. Plan sponsors will fewer choices, more target-date funds, and more passive funds in 2012, he said.
New products
Experts say that in 2012 financial-services firms will focus more on selling products more suitable for the times. “There will be an increased interest in strategies that offer lower volatility and guards against market shocks,” said Schaus. And more investment will go to emerging markets and inflation hedging such as commodities and real estate, she said.
Goldbrum said there will be continued focus on lifetime income products. “Lifetime income annuity options and other products and services will continue to be a focus as plan participants, especially baby boomers nearing retirement, employers and the retirement-plan community try to help workers figure out how to construct a reliable retirement income stream,” he said.
“Most of the momentum on this will come from product and service providers but regulators may adopt rules that would require employers to provide lifetime income illustrations or examples on participant statements,” he said.
Wray also suggested that 401(k) plan participants should keep an eye on stable-value funds, one of the more common investment options in a 401(k) plan.
“Eventually these extremely low interest rates could impact its viability,” he said. “Stable value is expensive on its face because you have to include the cost of the guarantee. If interest rates are zero for five-year bonds, that's a problem.”
New strategies
Brimhall suggested you would be wise to consider tax diversification in 2012, “especially in light of uncertainty around future tax rates.” He recommends putting assets in each of the three types of accounts — tax-free, tax-deferred and taxable — so you have the “maximum flexibility to respond if tax rates change.”
Pre-retirees who are quite confident that they will stay in the upper tax brackets, and who believe taxes will continue to rise, may consider putting more of their savings into tax-free accounts, like Roth IRAs,” Brimhall said.
“The higher taxes go, the more valuable tax-free income becomes,” he said.
Couples who don't qualify for a contributory Roth IRA because their income is too high may still consider contributing to a traditional non-deductible IRA and then converting it, Brimhall said. “Since the traditional non-deductible IRA was bought with after-tax dollars, the only thing taxable upon a conversion would be any gain since the IRA was contributed to,” Brimhall said.
Of course, there are some accounting pitfalls to be aware of — the IRS's pro-rata rule among them — so this idea should not be implemented without careful consideration by a tax professional beforehand, he said.
Also, Hale noted that in 2012 the oldest of the baby boomers reach age 66, making them eligible to receive their full Social Security benefit, if they haven’t already elected it.
“Some may want to consider delaying longer if they have the financial resources,” she said. “Every year they delay up to age 70, they will receive a guaranteed 8% boost in the form of delayed credits.”
Entitlement reform on hold
Pat Connor, a spokesman for MetLife, said he agreed that comprehensive tax and entitlement reform most likely will be put off until 2013, though there is a small chance of seeing something in 2012.
“On the retirement front, when tax reform does happen, we will likely see a cap on contributions to plans and/or a consolidation of plan types (401(k), 403(b) and 457 plans),” he said.
Brimhall and others said Congress may reduce spending at some point, and that could affect Medicare beneficiaries. “Medicare part B premiums are now ‘means tested’ and the premium for higher income folks can be three times that of the lower income,” he said.
“If Congress moves forward with entitlement reform, more means testing will probably come into play. Therefore, those in the higher brackets may need to plan on paying a larger and larger share of their premiums and maybe even co-insurance amounts.”
Other trends
Employers and employees both are going to be frustrated because employees at or near retirement age cannot afford to retire, said Rappaport.
“They will want to stay and it may create talent management challenges,” she said.
In addition, she warned that as more people see retirees struggling, “there will be growing awareness of the challenges of retirees.”
Wednesday, December 14, 2011
10 Tips To Find Your Unclaimed Cash
The 50 states and the District of Columbia are currently holding at least $32 billion in unclaimed funds, just waiting to be reunited with the rightful owners.
"Good Morning America" has helped thousands of people find money held for them by the states.
There are simple searches you can do in ten minutes or less. Plus we've uncovered more unusual sources of unclaimed cash that few people know about.
"GMA" is here to help with the top 10 tips you can use today to find your unclaimed cash!
1. Miscellaneous Money
If you are searching for things such as forgotten apartment security deposits, uncashed overtime checks, lost insurance refunds or abandoned safe deposit boxes, your first stop is the states. The National Association of Unclaimed Property Administrators (NAUPA) has set up a free website at www.unclaimed.org that will link you to the appropriate department in your state that holds the funds. (IMPORTANT: this is a .ORG website, NOT a .com. If you mistakenly type in .com, you will be taken to a pay site. It is never necessary to pay a fee or a finder to help you find unclaimed money.)
2. Missing Money
If you would like to search several states at once, you can do so at another free, though commercially run site called www.missingmoney.com. When you first search, you are prompted to enter your home state. Be sure to search again and this time choose "all states and provinces" on the drop down menu. One last thing: it's not actually ALL states. On the site's home page you can view a map of which states are and are not included. If you have lived in states that do not participate in this site, be sure to go back to Unclaimed.org and search those sites individually.
3. Unclaimed Savings Bonds
It's easy for savings bonds to go unclaimed because they take 30 to 40 years to mature. That's why the Treasury Department has set up a simple search website, available HERE, where you can find forgotten bonds by typing in your social security number. Certain bonds are not listed online and require a hand search. You can read about them at the same Treasury link.
4. Federal Tax Refunds
Everybody looks forward to getting an income tax refund check, but if yours didn't arrive, what do you do? The IRS now provides a "Where's my Refund?" feature on its website. You can look up your missing check by entering the amount you are owed, plus your social security number.
5. Lost Life Insurance Policies
The proceeds of lost life insurance policies may turn up in your state search. If not, and you suspect you are the beneficiary of a loved one's lost life insurance policy, you can hire a company called MIB Solutions to search for you. MIB is a private company that houses life insurance application information for much of the industry. It costs $75 to search. Go to www.policylocator.com for more information.
6. Failed Accounts In a Bank If you didn't collect your money when your bank went under, chances are your account was insured by the Federal Deposit Insurance Corporation (FDIC). The good news, in that case, is that the FDIC is holding your money, and you can find it HERE.
7. Failed Accounts In a Credit Union
If your money was in a credit union as it failed, visit the National Credit Union Administration (NCUA) HERE to track down your money.
8. Misplaced Pensions
If your company still exists, or has been bought out, you need to approach the company directly. If you are owed a pension from a company that went under, there is a federal agency, the Pension Benefit Guaranty Corporation (PBGC), that safeguards private pensions. You can track down your pension HERE on the PBGC website.
9. Retirement Money
The Employee Benefits Security Administration (EBSA), is the federal agency charged with making sure retirement money is reunited with its rightful owners. The EBSA sometimes even sues to seize retirement money. You can utilize the agency's services by clicking HERE.
10. Lost 401(k)s
Sometimes when people leave a job, they leave behind a 401(k) as well. If the company goes out of business, that only compounds the confusion. Fortunately, companies that administer 401(k) plans have teamed up to create a search engine you can use to track down your 401(k).
.
"Good Morning America" has helped thousands of people find money held for them by the states.
There are simple searches you can do in ten minutes or less. Plus we've uncovered more unusual sources of unclaimed cash that few people know about.
"GMA" is here to help with the top 10 tips you can use today to find your unclaimed cash!
1. Miscellaneous Money
If you are searching for things such as forgotten apartment security deposits, uncashed overtime checks, lost insurance refunds or abandoned safe deposit boxes, your first stop is the states. The National Association of Unclaimed Property Administrators (NAUPA) has set up a free website at www.unclaimed.org that will link you to the appropriate department in your state that holds the funds. (IMPORTANT: this is a .ORG website, NOT a .com. If you mistakenly type in .com, you will be taken to a pay site. It is never necessary to pay a fee or a finder to help you find unclaimed money.)
2. Missing Money
If you would like to search several states at once, you can do so at another free, though commercially run site called www.missingmoney.com. When you first search, you are prompted to enter your home state. Be sure to search again and this time choose "all states and provinces" on the drop down menu. One last thing: it's not actually ALL states. On the site's home page you can view a map of which states are and are not included. If you have lived in states that do not participate in this site, be sure to go back to Unclaimed.org and search those sites individually.
3. Unclaimed Savings Bonds
It's easy for savings bonds to go unclaimed because they take 30 to 40 years to mature. That's why the Treasury Department has set up a simple search website, available HERE, where you can find forgotten bonds by typing in your social security number. Certain bonds are not listed online and require a hand search. You can read about them at the same Treasury link.
4. Federal Tax Refunds
Everybody looks forward to getting an income tax refund check, but if yours didn't arrive, what do you do? The IRS now provides a "Where's my Refund?" feature on its website. You can look up your missing check by entering the amount you are owed, plus your social security number.
5. Lost Life Insurance Policies
The proceeds of lost life insurance policies may turn up in your state search. If not, and you suspect you are the beneficiary of a loved one's lost life insurance policy, you can hire a company called MIB Solutions to search for you. MIB is a private company that houses life insurance application information for much of the industry. It costs $75 to search. Go to www.policylocator.com for more information.
6. Failed Accounts In a Bank If you didn't collect your money when your bank went under, chances are your account was insured by the Federal Deposit Insurance Corporation (FDIC). The good news, in that case, is that the FDIC is holding your money, and you can find it HERE.
7. Failed Accounts In a Credit Union
If your money was in a credit union as it failed, visit the National Credit Union Administration (NCUA) HERE to track down your money.
8. Misplaced Pensions
If your company still exists, or has been bought out, you need to approach the company directly. If you are owed a pension from a company that went under, there is a federal agency, the Pension Benefit Guaranty Corporation (PBGC), that safeguards private pensions. You can track down your pension HERE on the PBGC website.
9. Retirement Money
The Employee Benefits Security Administration (EBSA), is the federal agency charged with making sure retirement money is reunited with its rightful owners. The EBSA sometimes even sues to seize retirement money. You can utilize the agency's services by clicking HERE.
10. Lost 401(k)s
Sometimes when people leave a job, they leave behind a 401(k) as well. If the company goes out of business, that only compounds the confusion. Fortunately, companies that administer 401(k) plans have teamed up to create a search engine you can use to track down your 401(k).
.
Friday, May 27, 2011
Dear Editor, The Diaporan Star
The Editor,
The Diasporan Star
I salute you and your newspaper for dedicating a whole page of your newspaper to a very important topic-finance, a thing many of us take for granted. I hope this is something that will stay and I hope that other African based and/ or focused papers will devote a good amount of time and space to this very crucial topic.
I read the piece titled Financial Check-up with Chuck Dikko; Investing For a Financially Secure Retirement on page 21 of your May 2011 edition and have some comments and/ or questions as follows.
ELIGIBILITY
It is true that the typical eligibility for a 401 K plan is usually 1 year but there are other requirements. The regulation requires that you are age 21 and meet at least 1 year of service with a minimum of 1000 hours worked. The law also requires that a company must not let one wait more than 6 months after eligibility before participation. Hence companies must have at least two entry Dates. If a company requires you to wait for 2 years (not an option for 401K but with other qualified plans) before participation, you become fully vested immediately upon such participation.
CONTRIBUTIONS
It is true that the most an employee can contribute towards his qualified plan (401K) in a year is $16500 for 2011. But note that the most that can be contributed to your plan in a year by a company is the lesser of $49000 or 100% of compensation. Contributions to your 401K can come from three sources (employee deferral $16500 max, Forfeitures and Employer contribution). The $16500 employee contribution is the max one can contribute in a year but if you work for many employers, each employer can contribute up to the lesser $49000 or 100% of your compensation in 2011.
VESTING
It is true that an employee’s contribution is immediately vested (100 % vesting) but the employers contribution to a 401K can only vest on a 2-6 graduated cliff (0%, 20%, 40%, 60%, 80% and 100%) or 3 year vesting schedule not the 7 year reported by your paper.
A 7 year vesting schedule only applies to a Defined Benefit plan. For example a Defined Benefit plan can vest on a 3 to 7 year graduated cliff or a 5 year cliff.
An employer can offer a more favorable vesting schedule but cannot offer one that is longer than the time frame required by regulation.
LOANS / WITHDRAWALS
It is true that loans are allowed in a 401K plan but a proof of financial hardship as reported by your paper is not a requirement. The loan may not exceed the lesser of (a) $50000 or (b) ½ of the participant’s vested account balance. Exception to this loan amount is when vested account balance is less than $20000. In this situation, the maximum loan is limited to the lesser of (A) $10000 or (B) the vested account balance. It should be noted that the loan amount is reduced by the highest outstanding loan balance within the last 12 months period even if such loans have been paid off.
While withdrawals are taxed and are hit with a 10% penalty, the 10% penalty can be avoided if the employee meets one of the following requirements; age 59 and half, death, disability, substantially equal periodic payment-section 72t, medical expenses in excess of 7.5 % of AGI Adjusted Gross Income and Federal Levy Tax.
CASHING OUT
Upon termination of employment with a company you can cash out your 401K tax free if there is a direct transfer to an IRA or another qualified plan. An indirect transfer to you will be hit with a 20 % tax withholding. For example, assuming your account balance was $10000, the employer will issue you a check in the amount of $8000. You will have up to 60 days to deposit that amount plus the amount withheld into an IRA or a qualified plan to avoid the 20 % withholding. That is, you must deposit the full $10000. When next you file your taxes, Uncle Sam will then reimburse you the $2000 that was withheld by your former employer.
MANDATORY WITHDRAWALS
You are required by law to start withdrawing (RMD-Required Minimum Distributions) from your 401K by April 1 following the year you turn 70 and half. All other distributions must be done by December 31st of the year. You will be hit with a 50% penalty (of the amount you were supposed to withdraw) if you fail to do a required minimum distribution.
An exception to not withdraw is only available if you are still employed by the plan sponsor. This exception is not available to anyone who is a 5% or more owner of the said company.
DIASPORAN ANGLE
You reported that “for the Africans in the Diaspora, saving for retirement is three times as hard compared to the general population…” Is this number compiled from statistics or is this a “journalistic opinion?” I am just curious to know if there have been studies done to substantiate this conclusion.
Once again, I applaud your effort to educate the African on this crucial topic. I hope that your paper will be kind enough to share my comments with your readers and I welcome any feedback from you and your editorial team. I can be reached via email at reuel02@gmail.com or by phone at 973-223-4059.
Thanks
Reuel
The Diasporan Star
I salute you and your newspaper for dedicating a whole page of your newspaper to a very important topic-finance, a thing many of us take for granted. I hope this is something that will stay and I hope that other African based and/ or focused papers will devote a good amount of time and space to this very crucial topic.
I read the piece titled Financial Check-up with Chuck Dikko; Investing For a Financially Secure Retirement on page 21 of your May 2011 edition and have some comments and/ or questions as follows.
ELIGIBILITY
It is true that the typical eligibility for a 401 K plan is usually 1 year but there are other requirements. The regulation requires that you are age 21 and meet at least 1 year of service with a minimum of 1000 hours worked. The law also requires that a company must not let one wait more than 6 months after eligibility before participation. Hence companies must have at least two entry Dates. If a company requires you to wait for 2 years (not an option for 401K but with other qualified plans) before participation, you become fully vested immediately upon such participation.
CONTRIBUTIONS
It is true that the most an employee can contribute towards his qualified plan (401K) in a year is $16500 for 2011. But note that the most that can be contributed to your plan in a year by a company is the lesser of $49000 or 100% of compensation. Contributions to your 401K can come from three sources (employee deferral $16500 max, Forfeitures and Employer contribution). The $16500 employee contribution is the max one can contribute in a year but if you work for many employers, each employer can contribute up to the lesser $49000 or 100% of your compensation in 2011.
VESTING
It is true that an employee’s contribution is immediately vested (100 % vesting) but the employers contribution to a 401K can only vest on a 2-6 graduated cliff (0%, 20%, 40%, 60%, 80% and 100%) or 3 year vesting schedule not the 7 year reported by your paper.
A 7 year vesting schedule only applies to a Defined Benefit plan. For example a Defined Benefit plan can vest on a 3 to 7 year graduated cliff or a 5 year cliff.
An employer can offer a more favorable vesting schedule but cannot offer one that is longer than the time frame required by regulation.
LOANS / WITHDRAWALS
It is true that loans are allowed in a 401K plan but a proof of financial hardship as reported by your paper is not a requirement. The loan may not exceed the lesser of (a) $50000 or (b) ½ of the participant’s vested account balance. Exception to this loan amount is when vested account balance is less than $20000. In this situation, the maximum loan is limited to the lesser of (A) $10000 or (B) the vested account balance. It should be noted that the loan amount is reduced by the highest outstanding loan balance within the last 12 months period even if such loans have been paid off.
While withdrawals are taxed and are hit with a 10% penalty, the 10% penalty can be avoided if the employee meets one of the following requirements; age 59 and half, death, disability, substantially equal periodic payment-section 72t, medical expenses in excess of 7.5 % of AGI Adjusted Gross Income and Federal Levy Tax.
CASHING OUT
Upon termination of employment with a company you can cash out your 401K tax free if there is a direct transfer to an IRA or another qualified plan. An indirect transfer to you will be hit with a 20 % tax withholding. For example, assuming your account balance was $10000, the employer will issue you a check in the amount of $8000. You will have up to 60 days to deposit that amount plus the amount withheld into an IRA or a qualified plan to avoid the 20 % withholding. That is, you must deposit the full $10000. When next you file your taxes, Uncle Sam will then reimburse you the $2000 that was withheld by your former employer.
MANDATORY WITHDRAWALS
You are required by law to start withdrawing (RMD-Required Minimum Distributions) from your 401K by April 1 following the year you turn 70 and half. All other distributions must be done by December 31st of the year. You will be hit with a 50% penalty (of the amount you were supposed to withdraw) if you fail to do a required minimum distribution.
An exception to not withdraw is only available if you are still employed by the plan sponsor. This exception is not available to anyone who is a 5% or more owner of the said company.
DIASPORAN ANGLE
You reported that “for the Africans in the Diaspora, saving for retirement is three times as hard compared to the general population…” Is this number compiled from statistics or is this a “journalistic opinion?” I am just curious to know if there have been studies done to substantiate this conclusion.
Once again, I applaud your effort to educate the African on this crucial topic. I hope that your paper will be kind enough to share my comments with your readers and I welcome any feedback from you and your editorial team. I can be reached via email at reuel02@gmail.com or by phone at 973-223-4059.
Thanks
Reuel
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