IFYF Monthly Investing Messages

Personal Finance December 01, 2014|Print

 

 


 

Investing For Your Future Monthly Message

December 2014

Barbara O’Neill, Extension Specialist in Financial Resource Management

Rutgers Cooperative Extension

oneill@aesop.rutgers.edu

Year-End Strategies for Your Tax-Deferred Retirement Savings Plan

 

Many people hold a substantial portion of their invested assets in tax-deferred employer retirement savings accounts. These savings plans include 401(k) plans for private sector workers, the Thrift Savings Plan (TSP) for federal government workers and service members, 457 plans for state and local government workers, and 403(b) plans for employees of public and private schools, colleges and universities, and non-profit organizations. Advantages of employer retirement savings accounts include automated savings via payroll deduction, tax-deferral of investment plan earnings, and a federal income tax write-off for the amount contributed by employees. Many 401(k) plans and some 403(b) plans also feature employer matching, which is essentially “free money” that should not be passed up. For example, a match of fifty cents for every dollar saved is equivalent to a 50% risk-free return on your money.

 

As the end of the year approaches, and before the “holiday rush,” take a few minutes to review your tax-deferred plan including the paperwork that you filled out initially and how much you are investing. Consider the following suggestions:

 

  1. Check Your Beneficiary Designations- When was the last time that you reviewed the people who will receive your retirement plan funds (and other assets) if you are no longer alive? Beneficiary changes may need to be made for a variety of reasons including death of a beneficiary, disability (owner or beneficiary), marriage (owner or beneficiary), divorce (owner or beneficiary), employer retirement plan changes, and a change in employment. For a Rutgers Cooperative Extension form to record all of your beneficiary designations in one place, see http://njaes.rutgers.edu/money/pdfs/beneficiary-designations.pdf.

 

  1. Get More Free Money- Generally, the more money that workers save, the more their employers will match (if the retirement savings plan includes a matching component), up to a specified cap such as 6% of pay. For example, if a worker earning $50,000 saves 6% of pay ($3,000), the employer might match it by $1,500 (50% match) or $3,000 (100% match). Over time, with compound interest on investment earnings, the additional savings provided by employer matching is substantial.

 

  1. Kick It up a Notch- Decide now to save more money next year in your employer retirement savings plan and complete the paperwork to have the increased savings take effect in January. Aim to increase your savings by 10% per year. For example, if you currently save $300 a month, save $330 next year ($300 + $300 (.10) or $30 = $330). If you increase your contribution by 10% a year, you will double your savings plan deposits after 10 years.

 

  1. Learn More About Your Retirement Plan Options- If your employer has added new retirement savings plan options (e.g., mutual funds), or you don’t know much about the current ones, bone up now. Request and read a prospectus for each mutual fund or variable annuity plan that you are considering. Remember that mutual funds with similar titles may have very different portfolio compositions. For example three 2020 target date mutual funds may have different percentages of stocks, bonds, and cash. You have to “do your homework” and know what you are buying.

 

  1. Reduce Portfolio Expenses- Some fees are part and parcel of retirement savings accounts such as plan administration fees charged by investment firms. Others are within the control of individual investors. A key feature to look for is a mutual fund’s expense ratio, which is the percentage of fund assets that is spent on operating expenses such as fund management, legal and accounting fees, and marketing costs. The lower a fund’s expense ratio, the better. Consider replacing mutual funds with high expense ratios greater than 1.5% with low-cost index funds. Small fee differences can add up to substantial sums over time.

 

  1. Rebalance Your Portfolio- As the end of the year approaches, consider rebalancing back to your original asset allocation percentages. For example, 50% stock, 40% fixed income investments such as bonds, and 10% cash equivalent assets such as money market mutual funds. As stock market prices and interest rates go up and down, the value of invested assets and their weightings in a retirement savings account will change. In the above example, the stock percentage might increase to 60% and the weighting of the other two asset classes would decrease. Do a review at least quarterly. Some retirement plan providers provide automatic account rebalancing services on a specified date such as the end of a calendar year or on a plan participant’s birthday.

 

  1. Move Your Money- If you changed jobs during the past year or plan to do so soon, don’t ignore your retirement savings account balance. While you can sometimes leave your account with a former employer, most financial experts recommend against this. First, you will have more investment choices by rolling the money over into an IRA at a custodian of your choosing (e.g., mutual fund company or brokerage firm) and, second, you will not have to contact a former employer’s HR department twenty or thirty years in the future to get your money. Moving your money gives you more control over where and how it is invested.

 

  1. Consider Other Tax-Deferred Retirement Savings Plans- Tax-deferred employer retirement savings accounts are not the only place to build up a retirement nest egg. If you are self-employed or have a sideline business, you can fund a SEP-IRA. In addition, all workers with earned income can open a Roth and/or traditional IRA or purchase tax-deferred fixed or variable annuities. For more information about tax-deferred investing, see http://www.extension.org/pages/9666/investing-unit-7:-tax-deferred-investments#.U0XuCU1OWM8.

 

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