Posts Tagged ‘401(K)’
Should You Start a 401(k) After Age 60?
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A reader of AskTheMoneyCoach.com wanted to know whether or not it’s a smart decision for them to launch a 401(k) or 403(b) investment plan later in life. The person asked me simply:
Q: “Should I start a 401(k) or 403(b) investment plan at 63 years of age?”
A: Yes! Actually, I think it can be a good idea to start a 401(k) plan at any point during your working years. You may know that a 401(k) or 403(b) is an employer sponsored retirement savings plan. But you may not know the full range of benefits associated with these plans.
Continue reading “Should You Start a 401(k) After Age 60?” »
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Should I Use My 401(k) Money To Pay My Child’s College Tuition?
Q: To finish college, our son will need an additional $20,000 for his final two years. We are thinking of using some of our 401(k) money. My husband will be almost 60 by then, so no penalty.
With our social security plus my husband’s pension, our income will be close to his present working income. We have no debt. What do you think about using 401K money in this situation?
A: Typically, I tell parents of college students not to sacrifice their own retirement in order to foot their children’s college tuition bills. In your case, however, I think it actually might be a smart strategy overall financially for your entire family.
Here are the reasons why. You meet three criteria that I think gives your family a bit more financial stability than most.
First of all, you said your son has two final years left. I’m assuming that he has already been through at least two years of college. Maybe he has already been through three years of college.
The fact of the matter is; most college students at public colleges nowadays actually need five years to graduate instead of four. But if you already know he only has two years left, and $20,000 is his financial need, that tells me he requires roughly $10,000 a year, which isn’t an excessive amount when you think about the rate of tuition inflation and the cost of a college education overall.
Secondly, you indicated that even if you use some of your 401(k) money, because you have other assets like the Social Security and your husband’s pension, you expect your income is pretty much going to be on par with his current working income. That tells me that you are in a much stronger position than most.
Unfortunately, after the retirement phase, many people find that their income drops significantly and those who are relying on Social Security experience a dramatic decrease in the quality of their life from a financial standpoint.
Social Security, only pays retirees an average of about $1000 a month. If you are able to also boost your financial standing with your husband’s pension, that is a great thing. We all know, of course, that pensions are hard to come by these days, because not many companies have kept those kinds of retirement plans in force for their workers.
Lastly, you said that you have no debt. I don’t know if you mean no credit card debt, no auto loans or just no debt completely, — as in your mortgage is already paid off too. But if that is the case, again, you have a greater degree of financial stability than do most Americans.
Being debt‑free really does keep you with so many more financial options. So if you can prevent your son from going into debt from taking out student loans, which is probably the option that he might consider if he doesn’t get the $20,000 from you, then I say yes.
Overall, for the family, you will be showing your son a great example to say, “Let’s try to do this the smart way. Let’s pay for school with cash. Let’s use our savings as opposed to taking on a loan.”
Having said all that, you might want to think about one other option, which is to let your son get serious about applying for scholarships and grants. Even if he is about to enter his junior or senior year, every single year that he is in school he can and should be applying for scholarships and grants.
This is free money that doesn’t have to be repaid, but it does require sweat equity, work, applications, essays, transcripts, et cetera, on his part. But the payoff is definitely worthwhile. If he can muster up $5000, $10,000 or even $20,000 in scholarships and grants, obviously that will prevent him from having to take on student loans. But it will also keep you from having to raid your 401K.
Good luck to your entire family … and your son is lucky to have such thoughtful, financially conscientious parents!
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Four Ways to Tell If Your 401(k) Plan is Being Mismanaged
With many people worried about Social Security, and more employers doing away with traditional pension plans, the 401(k) is taking on a greater significance for those planning for retirement. But how do you know if the 401(k) plan offered by your employers is a good one — or a poorly run one?
Experts say there are definite warning signs you should be aware of. Here are four ways to spot when your 401(k) is being mismanaged:
1. The Plan Charges High Annual Fees
“If a plan has abnormally-high fees, it’s probably a sign that the company is not taking its fiduciary responsibility seriously,” says Mike Alfred, co-founder and CEO of BrightScope, a free service that tracks and compares more than 55,000 401(k) plans.
How high is too high when it comes to fees? Alfred likes to see fees of about 1%. “Certainly, there are not a lot of services offered by 401(k) plans that are worth 2% a year. Nevertheless, such fees get charged all the time,” he notes.
The issue of high fees is most prevalent among smaller business, where some 401(k) plans may impose yearly fees ranging from 3% to 5% of assets.
“But even for small companies, with only a dozen or so employees, there’s really no good excuse to justify those kind of fees.”
2. The Plan Has Major Gaps in Investment Options
The best 401(k) plans offer ample opportunities to invest in every asset class, including stocks, bonds, commodities, real estate, and so on. But some company plans are missing entire asset classes.
“If a 401(k) plan is missing key asset classes, it’s a sign of mismanagement that almost rivals high fees,” says Alfred. The problem with a plan that fails to provide, for example, a real estate fund or an international fund, is that you’re missing out on significant investment opportunities and hurting your chances to diversify your portfolio.
Continue reading Lynnette’s article, Four Ways to Tell If Your 401(K) Plan is Being Mismanaged on WalletPop
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How Your 401(k) Plan Is Costing You Money
A 401(k) plan has lots of fees, and savvy investors may be aware of various investment-related charges – such as a management fee to a mutual fund manager’s or the sales commission paid when making a transaction.
What most people don’t know, however, is that 401(k) plans also include several other hidden fees that can eat away at their investments.
These include so-called “12b-1 fees” (which are marketing fees passed along to investors) and administrative costs of various types imposed by retirement plan sponsors.
Finding these fees isn’t easy. In fact, you have to pore over a fund’s prospectus and an annual report to ferret out exactly what charges are imposed by a 401(k) retirement plan.
Perhaps this explains why, according to an AARP survey, more than 80% of retirement plan participants have no idea what their 401(k) charges. Even worse, some people mistakenly think that investing in their 401(k) plan on the job is “free” and that no fees are charged.
In reality, in 2009, 401(k) investors in stock funds paid an average expense of .74% of their assets, while the typical bond investor paid an average of .55%, according to a report from the Investment Company Institute.
Think small numbers don’t make a big difference? Think again. A GAO report found that a typical retiree will lose about $100,000 when their 401(k) plan has fees of 1.5%, instead of .5% in fees. That’s just a one percentage-point difference, but it has a huge impact.
Fortunately, there is some good news on this topic and change is soon coming. Under new guidelines issued by the U.S. Labor Department, by January 1, 2012 retirement plans will have to do a better job of clearly disclosing their fees and charges. Right now, disclosure is murky at best.
In the meantime, until disclosure improves, there is an easy way to see what your employer-sponsored retirement plan is costing you. Read the rest of Lynnette’s article, How Your 401(k) Plan Is Costing You Money on WalletPop.
