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While data shows more people are saving for the future, others are putting their financial futures at risk by taking 401(k) hardship withdrawals.

401(k) hardship withdrawals should be a last resort, but people are playing fast and loose with their retirement savings, as shown by recent reports from Vanguard, Bank of America, and Fidelity.

According to Bank of America: 

• Roughly 15,950 participants took hardship distributions in the second quarter of 2023, up 36% from 2022. 
• The average participant hardship amount is $5,050.¹

Vanguard’s How America Saves 2023 Report claims, “In 2021, overall hardship withdrawal activity reverted to pre-pandemic levels from 2019, and in 2022, hardship withdrawal activity increased to a new high.”² 

Vanguard reports that 2.8% of participants took a 401(k) hardship withdrawal in 2022, up from 2.1% in 2021.³

Additionally, Vanguard reports that 3.6% of participants took a non-hardship 401(k) withdrawal.⁴

The ability to take a withdrawal from your 401(k) plan may seem appealing – especially if you are facing a financial emergency. 

However, a 401(k) hardship withdrawal may cost you more than you think. 

401(k) Hardship Withdrawals Qualifications

In order to withdraw from your 401(k), you must be at least 59½ to avoid paying an early withdrawal penalty.

That is unless you qualify for a hardship withdrawal.

The IRS explains, “A hardship distribution is a withdrawal from a participant’s elective deferral account made because of an immediate and heavy financial need, and limited to the amount necessary to satisfy that financial need. The money is taxed to the participant and is not paid back to the borrower’s account.”⁵

However, not just anyone qualifies for a 401(k) hardship withdrawal.

First, your individual 401(k) plan must allow for it, which is likely as Vanguard reports that 95% of plans offer hardship withdrawals.⁶

Next, you must prove you have a financial need that is considered “an immediate and heavy financial need” for any of the following: 

• Medical care expenses for the employee, the employee’s spouse, dependents or beneficiary.

• Costs directly related to the purchase of an employee’s principal residence (excluding mortgage payments).
• Tuition, related educational fees, and room and board expenses for the next 12 months of postsecondary education for the employee or the employee’s spouse, children, dependents, or beneficiary.
• Payments necessary to prevent the eviction of the employee from the employee’s principal residence or foreclosure on the mortgage on that residence.
• Funeral expenses for the employee, the employee’s spouse, children, dependents, or beneficiary.
• Certain expenses to repair damage to the employee’s principal residence.⁷

Now that most plans offer hardship withdrawal as an option, it may seem like an easier way to alleviate financial stress.

Given that many Americans are strained financially, it is not too surprising to see an increase in these 401(k) hardship withdrawals.

According to Vanguard, “In 2022, 36% of hardship withdrawals were used to avoid a home foreclosure or eviction, up from 31% of withdrawals in 2021. The second most common reason was medical expenses, as 1 in 3 hardship withdrawals were initiated for this purpose, in line with 2021.”⁸

The Difference between a 401(k) Loan and a 401(k) Hardship Withdrawal

It’s important to note that we’ve been discussing 401(k) hardship withdrawals and not 401(k) loans.

Both allow plan participants to withdraw money from their 401(k)s, but they work very differently.

A 401(k) loan is meant to be paid back, whereas a 401(k) hardship withdrawal is simply withdrawing money from your retirement savings. And since you are withdrawing money from your retirement savings, you will be taxed on the money withdrawn and face possible penalties. 

In contrast, a 401(k) loan essentially allows participants to borrow from themselves and then pay themselves back with interest, without having to pay penalties or taxes on the amount borrowed as long as it is paid back on time.

While a 401(k) loan might sound like a better way to get the money you need, investors should not rush to take a loan.  

There are downsides that – if you aren’t aware of upfront – could cost you way more than you planned. 

[Related Read: The Downside of 401(k) Loans: Investors Beware]

The Immediate Cost of a 401(k) Hardship Withdrawal

When facing mounting medical bills or possible foreclosure, it’s tempting to seek a 401(k) hardship withdrawal.

But this money is not actually available immediately.

It can take weeks for the money to leave your 401(k).

If you need cash immediately, a 401(k) hardship withdrawal may not help you. 

It’s also important to understand that, unlike 401(k) loans, you must pay taxes on the amount withdrawn from your 401(k).

Let’s say you take a 401(k) hardship withdrawal because you are cash-strapped, but because of the tax implications, you wind up paying more in the end. 

Moreover, if you take an early 401(k) withdrawal that does not qualify as a “hardship withdrawal,” you may have to pay penalties in addition to taxes. 

The Future Cost of a 401(k) Hardship Withdrawal

In addition to having to pay taxes and possible penalties in the immediate future, there are costs down the road.

When you withdraw money from your savings, you are left with less savings.

A 401(k) withdrawal is not a loan. You are not paying it back. You are simply taking money away from your retirement.

According to the Center for Retirement Research at Boston College, early withdrawals reduce overall 401(k) assets for retirement by 25% on average.⁹

In addition to paying taxes and possible penalties on the amount, you are also losing out on the power of compound returns.

Research conducted by Employee Benefit Adviser shows, “A hypothetical 30-year-old participant who cashes out a 401(k) savings balance of $5,000 today would forfeit up to $52,000 in earnings the sum would have accrued for them by age 65, if we assume the account would have grown by 7% per annum.”¹⁰

That’s a lot of money you’ll miss out on come retirement. 

A 401(k) Hardship Withdrawal Should Be a Last Resort

If you are desperate for money, a 401(k) hardship withdrawal should still be your last resort. 

Don’t put your retirement savings at risk.

Instead, consider one of these alternatives:

• Use HSA savings to cover medical expenses.
• Consider financing specifically designed for medical needs, such as CareCredit.
• Tap into other savings accounts, such as emergency savings.
• Apply for a 0% credit card, pay with it, and then pay it off interest-free before the promotional period ends.
• Take out a personal loan.
• Use your home equity line of credit.
• Ask a family member for a loan. 

Before you make any major financial decisions, especially those involving your retirement savings, it is important to speak with a financial advisor.

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SOURCES

1. https://business.bofa.com/content/dam/flagship/workplace-benefits/id20_0905/documents/Participant-Pulse.pdf
2. https://institutional.vanguard.com/content/dam/inst/iig-transformation/has/2023/pdf/has-insights/how-america-saves-report-2023.pdf
3. https://institutional.vanguard.com/content/dam/inst/iig-transformation/has/2023/pdf/has-insights/how-america-saves-report-2023.pdf
4. https://institutional.vanguard.com/content/dam/inst/iig-transformation/has/2023/pdf/has-insights/how-america-saves-report-2023.pdf
5. https://www.irs.gov/retirement-plans/hardships-early-withdrawals-and-loans
6. https://institutional.vanguard.com/content/dam/inst/iig-transformation/has/2023/pdf/has-insights/how-america-saves-report-2023.pdf
7. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-hardship-distributions
8. https://institutional.vanguard.com/content/dam/inst/iig-transformation/has/2023/pdf/has-insights/how-america-saves-report-2023.pdf
9. http://crr.bc.edu/wp-content/uploads/2015/01/IB_15-2.pdf
10. https://www.benefitnews.com/advisers/opinion/to-show-participants-you-care-help-them-avoid-401k-cash-outs

 

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The IRS recently announced a 2-year delay to the planned changes in catch-up contributions in 401(k)s and Thrift Savings Plans. 

The new rule requiring high-income investors to make catch-up contributions only to Roth 401(k) accounts will not take effect until 2026.

This update comes as a relief to many who were concerned they might not be able to even make catch-up contributions should their employers not offer the Roth provision. 

Keep reading for what’s changed and why, and what you need to know to plan accordingly for the future. 

The Secure Act 2.0 Changed Catch-Up Contributions

Under the Secure Act 2.0, section 603, passed in December of 2022, 401(k) investors ages 50 and over who make more than $145,000 have to make catch-up contributions to an after-tax Roth 401(k) account instead of a traditional pre-tax 401(k). 

The new rule was set to go into effect January 1, 2024.

The short deadline had many employers and plan providers scrambling to implement the provision in time due to the complicated nature of setting up a system that would funnel high-income employees into making only Roth catch-up contributions.

This also had investors concerned if their companies didn’t have a Roth 401(k) provision because – under this new rule – investors would not have been allowed to make catch-up contributions at all. 

The short deadline originally set forth in the Secure Act 2.0 would have left a lot of investors closer to retirement unable to use their catch-up contributions to save even more should their employers not have the Roth in place. 

Not good, considering the retirement crisis we have in America and that the Secure Act 2.0 aimed to help more people save even more. 

IRS Delays the New Rule

The IRS clarified that they have set up a 2-year “administrative transition period” for the new Roth catch-up contributions requirements, delaying the implementation until 2026.

According to the IRS, “The administrative transition period will help taxpayers transition smoothly to the new Roth catch-up requirement and is designed to facilitate an orderly transition for compliance with that requirement. The notice also clarifies that the SECURE 2.0 Act does not prohibit plans from permitting catch-up contributions, so plan participants who are age 50 and over can still make catch-up contributions after 2023.”¹

What This Means for You

For now, those who make $145,000 or more who rely on catch-up contributions to bolster their retirement savings can continue to make contributions as planned in their 401(k)s – and get the tax break. 

And do so for the next 2 years.

This also gives high-earning investors time to adjust their retirement strategy in anticipation of this rule taking effect in 2026. 

Remember, in 2023, the 401(k) catch-up contribution is $7,500 in 2023, which means you can stash away $30,000 total. 

Major Secure Act 2.0 Changes You Need to Be Aware Of

There’s a lot in the Secure Act 2.0 that changes how you save and plan for retirement. 

We encourage you to reach out to a third-party expert who can advise you on how this new law specifically affects you and what changes may need to be made to your retirement strategy.

Before you reach out, please note that the type of advice you receive about your finances may be impacted by the type of advisor you resource for advice.

Check out our no-cost guide on how to understand The Different Types of Licenses Financial Advisors Have and What They Mean to You.

Send Me The Guide!

Sources:

1. https://www.irs.gov/pub/irs-drop/n-23-62.pdf

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With today’s economic landscape characterized by persistent inflation and rising interest rates, it’s no surprise that American households are feeling financial pressure. 

This has many Americans grappling with crucial financial questions: 

Should I pull back on my retirement savings contributions? 

Should I focus on paying off debt instead of saving for retirement? 

How do I balance securing my financial future while addressing immediate financial obligations? 

If you’re among those grappling with this dilemma, read on for insights on how you can effectively manage both financial goals.

The Growing Debt Problem

According to the New York Fed data recently released, total household debt rose in the second quarter of 2023 to $17.06 trillion.¹

Credit card balances saw the largest increase of all debt types – $45 billion – and now stands at a historic $1.03 trillion.²

In May 2023, the average credit card interest rate was 22.16%, according to The Federal Reserve.³ 

It’s important to clarify that this debt isn’t accrued for extravagant vacations or luxury items; rather, it’s largely driven by the rising costs of essentials like housing, healthcare, and education.

A U.S. News & World Report survey asked “consumers to give the main reason for their credit-card debt. The most common response was ‘increased costs coupled with insufficient income.’”⁴

And that’s just credit card debt. More Americans also took on personal loans in 2023. 

“Personal loan borrowers owe $232 billion in debt as of the second quarter of 2023 –  the highest in the 17 years for which data is available. That’s a substantial 21.5% increase from the second quarter of 2022, when Americans owed $191 billion.”⁵

As more Americans find themselves taking on high-interest debt simply to cover their basic living expenses, it’s placing substantial strain on their financial well-being.

And impacting how much investors can save for their desired retirement lifestyle. 

To amplify the problem…as the cost of living continues to rise, the amount required for a comfortable retirement also increases. 

Breaking Down the Problem

If you are currently drowning in high-interest debt, you may be tempted to stop saving for retirement altogether and instead pay off your debt.

However, this approach carries its own set of consequences. 

If you dedicate the next 5 years exclusively to debt repayment, you may become debt-free within that time frame, but you’ll also find yourself 5 years behind in building your retirement savings. 

This means potentially missing out on 5 years of compounded investment returns that regular retirement contributions could have provided.

It’s time and money that is hard to get back. 

Furthermore, individuals with 401(k) accounts who forgo contributing at least enough to receive their company’s matching funds during this 5-year period may miss out on 5 years of essentially free money. 

On the flip side, the interest rates on your outstanding debt may surpass the potential returns you expect on your retirement investments. 

For example, you hold $10,000 in credit card debt with an APR of 20%, and your 401(k) is expected to yield an annual return of 7%.

Choosing to pay only the minimum on your credit card while allocating funds to your retirement savings would mean incurring a net loss of 13% on your invested amount.

Debt Repayment or 401(k) Contributions?

The key to resolving this financial conundrum is to reframe the question itself. 

Instead of viewing it as a choice between paying off debt OR saving for retirement, ask this question: How can I pay off debt AND save for retirement concurrently?

Here are some suggestions for achieving this dual financial objective:

1. Prioritize High-Interest Debt: Begin by paying down high-interest debt while still allocating a portion of your income to retirement savings. It’s crucial to at least contribute enough to your 401(k) to secure your company’s match, as this is  essentially “free money.” Afterward, direct any extra funds toward high-interest debt repayment.
2. Establish a Budget: Create a budget that emphasizes debt reduction while also allowing you to contribute sufficiently to your 401(k) to obtain the full employer match. This balanced approach ensures that you’re not sacrificing valuable employer contributions while working to reduce debt. Also, make sure to budget in money to build your emergency fund. 
3. Build an Emergency Savings: The truth is, if you had an emergency fund to begin with, you probably wouldn’t be in debt or struggling to make ends meet. To avoid falling back into debt during unexpected financial emergencies, make funding this a priority.
4. Balanced Retirement Contributions: After addressing high-priority debt, increase your retirement savings contributions (even a modest percentage can have a substantial impact) while maintaining progress on debt reduction.
5. Maximize Retirement Contributions: As your debt becomes manageable or is eliminated entirely, strive to maximize your annual retirement savings contributions. Continue allocating funds towards retirement savings as you approach retirement age, maintaining a steady focus on your long-term financial security. Additionally, keep funding your emergency savings and avoid overspending. 

Better Prepare for a Life of Abundance in Retirement.
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SOURCES

1. https://www.newyorkfed.org/newsevents/news/research/2023/20230808#
2. https://www.newyorkfed.org/newsevents/news/research/2023/20230808#
3. https://fred.stlouisfed.org/series/TERMCBCCINTNS 
4. https://money.usnews.com/credit-cards/articles/survey-nearly-82-worry-about-their-credit-card-debt 
5. https://www.lendingtree.com/personal/personal-loans-statistics/

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One of the perks of employment is a 401(k). But what happens with the money you’ve accrued for retirement when you change jobs?

The money is still there. But leaving behind an old 401(k) may be a costly mistake.  

Keep reading for the costly dangers of forgetting to roll over an old 401(k). 

Why So Many Americans Are Forgetting to Roll Over Old 401(k)s

The job market is changing rapidly, which means people are switching jobs more than ever.

And this means, there are a lot of 401(k)s left behind with old employers.

According to recent data from Capitalize, “The number of forgotten 401(k)s increased by over 20% since May 2021 driven by a period of heightened job switching (“The Great Resignation”) with 3.8 million and 4.4 million accounts left behind in 2021 and 2022 respectively.”¹ 

Based on their findings, this equates to one in five investors leaving a 401(k) account behind when changing jobs.² 

But it is unfair to say most of these people simply forget to roll over 401(k)s.

For many, it may seem easier just to leave their 401(k) account where it is rather than rolling it over.

This may be due, in part, to the assumption that previous 401(k)s will be taken care of by the past employer.

This is far from the truth.

It’s your money, which means it is up to you to manage your 401(k).

And, if you don’t continue to care for it, you could miss out on a significant amount of retirement savings.

The Average Balance of Forgotten 401(k)s

It’s important to note that many of these 401(k) accounts have a substantial amount of money in them. 

Capitalize reports, “As of May 2023, we estimate that there are 29.2 million left-behind or forgotten 401(k) accounts holding approximately $1.65 trillion in assets, up from 24.3 million and $1.35 trillion in May 2021. This represents 25% of all 401(k) plan assets, up from 20% in May 2021.”³ 

For the individual, it adds up.

“The findings were striking: an estimated 24.3 million 401(k) accounts holding $1.35 trillion in assets had been left behind by job changers as of May 2021 with an average balance of $55,400 in each of these forgotten 401(k) accounts.”⁴ 

Now, keep in mind that if you have $55,400 in your previous 401(k), it is not being taken care of, meaning it may not grow as it should, and it may not be what you need when you reach retirement age. 

Let us explain.

Fees Are Still Charged

What you may not realize is that, even though you’ve left your job and enrolled in a new employer’s 401(k) plan, you will continue to pay fees on the original 401(k) account.

And the fees aren’t always cheap.

Unfortunately, many employees don’t even know how much they are paying in fees.

According to Capitalize: 

• Two-thirds (71%) responded that they don’t know the amount they’re currently paying.
• Nearly half estimate they’re paying less than 0.4% of total assets in 401(k) fees and costs — but in reality, only 10% of all plans charge less than 0.4%.⁵

Those who don’t roll over 401(k)s can even more easily lose track of how much they are paying in fees and the changing costs.

Difficult to Manage Different Accounts

For investors who jump from job to job they may have numerous 401(k)s left behind with former employers. 

Given that the average American held 12 different jobs before retirement, that’s a long string of 401(k) accounts.⁶

Numerous left-behind 401(k)s may make it more difficult to manage your retirement savings. 

Accounts Are Not Rebalanced as Needed

If you forget about an old 401(k), you aren’t actively monitoring it. 

That means your investments may not be properly allocated or rebalanced according to your changing financial goals. 

This can hamper the growth potential of your retirement savings.

You can make changes to a 401(k) you left behind, but you can no longer contribute to it. 

If you want to make changes, you would have to be proactive and reach out to the investment custodian, and have them make the changes to the investments.

Miss Out on a Huge Chunk of Money for Retirement

The number one reason why you shouldn’t forget to roll over 401(k)s is because it can potentially mean significantly less money for retirement. 

We’re talking hundreds of thousands of dollars less.

Capitalize estimates, “The potential opportunity costs of leaving behind money in a poorly allocated, high-fee forgotten 401(k) — up to $700,000 in retirement savings over 30 years to an individual, and $116 billion to retirement savers in aggregate.”⁷

401(k) Plan Options When You Leave a Job

When you change jobs, you have options.

You don’t have to leave your 401(k) behind with your former employer’s plan, but you can. Just know you’ve been warned.

You can also roll over old 401(k) savings into an individual retirement account (IRA). This option has many advantages, including consolidating more than one 401(k) account into an IRA. This works well for those with a string of old 401(k) accounts.

One of the advantages of rolling over to an IRA is that most 401(k)’s have a limited investment menu whereas rolling to an IRA can open up the world of other investment options, as well as professional management.

In addition, you can roll over your old 401(k) into your new 401(k), if permitted by your new employer. If you have at least $5,000 saved in your old 401(k), most companies allow you to roll it over.

Lastly, you could cash it out. However, this is inadvisable – especially if you are age 59½ and under. Cashing out your old 401(k) before then means it will be considered a taxable distribution. 

Not only will you have to pay taxes as ordinary income, but you’ll pay a 20% early withdrawal penalty. 

Before you decide what to do with your old 401(k), it’s important to know the irreversible and costly 401(k) rollover mistakes.

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SOURCES

1. https://www.hicapitalize.com/resources/the-true-cost-of-forgotten-401ks/
2. https://www.hicapitalize.com/resources/the-true-cost-of-forgotten-401ks/
3. https://www.hicapitalize.com/resources/the-true-cost-of-forgotten-401ks/
4. https://www.hicapitalize.com/resources/the-true-cost-of-forgotten-401ks/
5. https://www.hicapitalize.com/resources/the-true-cost-of-forgotten-401ks/
6. https://www.bls.gov/news.release/pdf/nlsoy.pdf
7. https://www.hicapitalize.com/resources/the-true-cost-of-forgotten-401ks/

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Starting in 2024, new rule changes to 401(k) catch-up contributions go into effect for investors ages 50 and over. 

These changes impact not only where you can save more, but also if you’re even able to. 

Some might argue this new law is essentially a tax increase. And that hurts investors who are closer to retirement. 

If you are nearing age 50 or you’re already 50 or over, make sure you read this article in its entirety because these changes will impact your ability to save even more for retirement.

While organizations and plan providers are lobbying for more time to prepare for these changes, it’s uncertain their requests will be granted. 

Now is the time to plan.  

Big Catch-up Contribution Changes Coming 2024

Congress passed the SECURE Act 2.0 in December 2022, and the law aimed to help more people save for retirement. 

There’s a lot in the Secure Act 2.0 that benefits 401(k) investors – including RMD changes and increased catch-up contribution limits.

However, section 603 on the Roth catch-up contribution provision for those ages 50 and over may hurt investors who are committed to taking advantage of the catch-up contributions.  

Specifically, section 603 amends the law to require catch-up contributions under an  employer retirement plan (other than a SIMPLE IRA or SEP plan) be made on a Roth basis for participants with income in the preceding calendar year in excess of $145,000.  

This means, beginning January 1, 2024, 401(k) investors will be required to make catch-up contributions as Roth contributions if their income meets or exceeds $145,000. 

Employees with incomes less than $145,000 can still make catch-up contributions on a pre-tax basis. 

But if you make over that, you must make catch-up contributions into a Roth 401(k). 

Implications for 401(k) Investors over Age 50

Section 603 has 2 big implications for 401(k) investors looking to save more for retirement.  

#1 No More Tax Break

You will no longer get a tax break for catch-up contributions if you earn more than $145,000 because with a Roth, your contributions are paid after tax. 

So, if you make $145,000 or higher, you need to fund pre-tax contributions in 2023 while you still can get the tax break. 

Here’s why…

Let’s say you make a $6,000 catch-up contribution this year while in the 35% tax bracket (which is the tax bracket right now for those making $145,000 and more).

If you withdraw the $6,000 in retirement while in the 15% bracket, you would have saved $1,200 in taxes.

Now, it’s 2024, and you make the same $6,000 catch-up contribution, but the money has to go into a Roth. 

Assuming you are in the same 35% tax bracket, you will have to pay $2,100 in upfront taxes just to contribute to the Roth. while you are in the 35% bracket.

Note: The $145,000 definition of high earner will change and will be indexed to inflation so that amount will change for future years.

#2 You will not be able to make catch-up contributions if your employer’s plan does not allow Roth contributions.

This new rule may be a problem for investors wanting to catch up because many 401(k) plans do not have the Roth provision. 

And, without a change to their 401(k) plan to add the Roth provision, employees that make over $145,000 will be prevented from taking advantage of the catch-up contribution allowance.

There May Be a Delay

There is pushback to delay this legislation – not only for the short effective date, but also the concern that 401(k) plans don’t have measures in place to verify the income of their employees.  

In late June, over 200 organizations wrote a letter to the leaders of the tax law writing committees, asking for legislation to delay the new requirement for 2 years.¹

According to the National Association of Plan Providers, “In the letter, the groups explained that proper systems do not yet exist and cannot be built within a year to instantly coordinate payroll systems with plan recordkeeping systems to ensure compliance with Section 603 before it becomes effective in 2024. Therefore, if relief from Section 603 compliance is not granted before the Fall, many plan sponsors will be, as a practical matter, forced to eliminate all catch-up contributions in their retirement plans, at least until they get updated systems in place.”²

As of publication of this article, no one would commit to firm timelines for guidance or legislative action.

Don’t Get Caught Off Guard

There’s a lot more to the Secure Act 2.0, and it’s critical to know what changes affect your retirement planning and saving. 

We encourage you to reach out to a third-party expert who can advise you on how this new law specifically affects you and what changes may need to be made to your retirement strategy.

Before you reach out, please note that the type of advice you receive about your finances may be impacted by the type of advisor you resource for advice.

Check out our no-cost guide on how to understand The Different Types of Licenses Financial Advisors Have and What They Mean to You.

Send Me The Guide!

Sources: 

1. https://www.napa-net.org/news-info/daily-news/where-we-are-roth-catch-contribution-provision 
2. https://www.napa-net.org/news-info/daily-news/where-we-are-roth-catch-contribution-provision

Everyone seems to have an opinion about target date funds. 

On one side, they make 401(k) investing easy. 

On the other, there can be a significant difference in performance over time from target date funds versus other plan options.  

In this article, we’re breaking down everything you need to know about target date funds so you can make the best choice for your financial future. 

Defining Target Date Funds

A target date fund, as the name implies, targets a certain retirement date. 

Rather than your money being invested as an individual based on your own goals, objectives, and risk tolerance, you are lumped in with your peers based on your age and expected retirement date. 

So, for example, if you are set to retire in 2050, you are put in a 2050 fund.

The idea is that the younger you are, the more aggressive you can be because you  have a longer time horizon for your money to work for you. 

And the closer you get to your expected retirement date, your portfolio becomes more conservative to reduce risk. 

The Upside of TDFs

TDFs are popular with some investors because they are easy and they take a lot of the thought out of selecting investment options. They set a glide path toward your retirement. 

You contribute each paycheck to your 401(k) and dollar cost average into it over a long period of time. 

You don’t have to be all that engaged with your 401(k) because the idea is that the fund will adjust over time based on your proximity to retirement in terms of risk. 

The Downside of TDFs

The idea of a target date fund is that you don’t have to worry about your 401(k).

Again, you’re on a glide path toward your retirement – more aggressive in the early years and more conservative in the latter years.

While they may take the guesswork out of investing, target date funds generally do not do a good job of managing risk when times are tough.

Take last year for example. Not only did the market go down in 2022, but interest rates went up. Even the bond portion of a target date fund was performing subpar because when interest rates go up, bond prices go down.

It’s not just down markets that may hinder your portfolio growth. 

Target date funds generally underperform when the market is doing well. 

This doesn’t necessarily mean over the long term TDFs won’t perform well enough for you to meet your goals. 

But those who want to engage with their 401(k)s and choose investments in the plan menu are likely to do better over time. 

Watch Mark Sorensen, CIO of 401(k) Maneuver, show the difference in performance between TDFs and other investments in a 401(k) menu. 

There is nothing wrong with the target date fund. It’s simple. It’s easy. 

But if you want your money to really work for you so you have even more money in retirement, it may be time to rethink target date funds. 

We encourage you to pull up multiple statements and look at the performance for every investment that’s allowed in your 401(k) and compare the TDF performance to the other funds on your statement. 

Again, look at multiple statements. 

Chances are, what you’ll find is that other funds outperform target date funds over time. 

Be in What’s Working and out of What’s Not

The key to maximizing your retirement savings – to really have your money work for you – is to be in what’s working and out of what’s not. 

And that takes engagement and learning on your own. 

Or, you could turn over your 401(k) to professional management. 

There are a lot of professional management platforms that are very much like target date funds. They manage your money based on age and expected retirement date. 

And then there is 401(k) Maneuver. We take into consideration your risk tolerance, goals, and experiences over time. 

For example, you could have two people the same age with the same expected retirement date. And they’re both nearing retirement.

One of them, for whatever reason, has to catch up. The other one is fully engaged with their 401(k) and saved quite a bit over the years, and they want to preserve what they have. 

The one who has to catch up probably needs to add risk or they’re never going to catch up. The other one wants to be conservative and protect what they have. 

They’re the same age. They have the same expected retirement date. But they’re very different.

At 401(k) Maneuver, we view our clients as individuals and take into consideration their unique situation. 

We look at our clients’ 401(k) accounts every quarter, and we rebalance them with the goal to be in what’s working and out of what’s not. 

Specifically, we look at current economic and market conditions and ask how much exposure we should have to the market over the next 90 days. 

From there, we allocate whatever percentage we think should be in equity (or the stock market) and invest it where we see momentum in specific investment styles or market sectors. 

In other words, we back out of what’s not working and into what is. 

In addition to managing your investments and quarterly rebalancing your 401(k), personalized account management may also help you stay on course to meet your retirement goals. 

Professional 401(k) management help has been shown to increase 401(k) investors’ returns.

In a 2019 study titled Advisor’s Alpha, The Vanguard Fund Group, Inc., reported a 3% average increase in the value of portfolios of clients who have their accounts professionally managed.¹ 

[Check out our 401(k) Calculator to see how professionally managed help may impact your 401(k) balance in retirement.]

The best part is with 401(k) Maneuver as your professional account management, there are no time-consuming in-person meetings and nothing new to learn, and you don’t have to move your account. 

Simply connect your account to our secure platform, and we regularly review and  rebalance your account for you, when necessary. 

If you need help with your 401(k), we’re here for you. Click below to book a complimentary 15-minute 401(k) Strategy Session.

Book a 401(k) Strategy Session

Sources:

https://www.investopedia.com/articles/personal-finance/102616/how-much-can-advisor-help-your-returns-how-about-3-worth.asp

The Secure Act 2.0 brought about numerous changes to how we save for retirement, including when investors need to start taking required minimum distributions (RMDs).

However, the IRS is making RMD changes yet again – this time delaying certain rules in order to provide a smoother transition not only for plan administrators, but also for participants and IRA owners.

If you are nearing retirement, it’s critical you stay up to date on these changes, and how they may affect your retirement portfolio. 

Here’s everything you need to know about these critical RMD changes. 

What Changed with RMDs?

Age Changes

Before the Secure Act 2.0 was signed into law December 29, 2022, you had to start taking RMDs by April 1 of the year after you turned 72. 

The new law extends the start of RMDs beyond age 72 on a gradual basis moving forward.

For those who reach age 72 after Dec. 31, 2022, and age 73 before Jan. 1, 2023, the RMD age would be 73.

Starting in 2033, the RMDs move up to age 75.

Penalty Changes

The bill also includes significant penalty changes for not taking required minimum distributions on time.

The hefty 50% penalty for not taking RMDs will drop to 25% in 2023.

The penalty drops to 10% if you take the required amount by the end of the second year that it was due.  

The penalty could be waived completely if you didn’t take the RMD due to an unforeseen event, but then withdrew it as soon as you could. 

Why Is the IRS Making RMD Changes Again?

The delay provides transition relief for plan administrators, plan participants, IRA owners, and beneficiaries relating to the RMD changes, as well as certain specified RMDs for 2023. 

These new changes come from a concern that it might take some time for companies to update their systems to reflect the changes. 

The IRS relief for the Secure Act 2.0 changes could have caused some people who turn 72 in 2023 to receive distributions from their retirement accounts that would be considered RMDs – even though they weren’t supposed to start taking them under the new rules.

To address this issue and give companies more time to update their systems, the IRS is providing some relief for individuals who receive distributions in 2023, but weren’t supposed to start RMDs yet under the new rules. 

What Are the New RMD Changes for 2023?

On July 14, the IRS released Notice 2023-54, which provides guidance regarding required minimum distributions (RMDs) under the SECURE 2.0.

Here’s what you need to know about the IRS relief for RMDs…

#1 Companies that didn’t treat certain distributions as rollover-eligible won’t be penalized for not following the new rules for distributions made between January 1, 2023, and July 31, 2023, to individuals born in 1951 (or their surviving spouses).

#2 The deadline for rolling over distributions that were not treated as rollover-eligible is extended from the usual 60-day period to September 30, 2023.

#3 The deadline for rolling over certain distributions made to an IRA owner born in 1951 (or their surviving spouse) is also extended to September 30, 2023, for distributions made between January 1, 2023, and July 31, 2023.

The IRS clarified that if a company failed to make a specific required minimum distribution, they won’t be penalized for it. Individuals won’t face the excise tax for not taking the full required distribution.

Also, the IRS announced that they will finalize proposed regulations for RMDs, but these regulations won’t apply before the year 2024, which is a change from their previous announcement.

Better Prepare for a Life of Abundance in Retirement.
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Let’s face it. There’s a lot going on with the economy, the Fed, and the markets. 

It doesn’t help that in this 24/7 newscycle world we live in that the media sensationalizes headlines that cause panic and fear in investors. 

If you’re feeling doom and gloom or uneasy about your investments, it’s helpful to zoom out and put things into perspective. 

And that’s what we’re getting into in this article and video interview below with 401(k) Maneuver Chief Investment Officer, Mark Sorensen. 

Keep reading for key market factors you need to be aware of right now.

The Fed and Rising Interest Rates

The Federal Reserve has been on a roll raising interest rates in an attempt to reach their 2% inflation mandate. 

And consumers are feeling the pinch. 

There is the concern that, if the Fed tightens too much, excessive rate hikes could harm the economy, leading to a recession. But, the Fed has pretty much said they think there’s more risk in stopping too soon than doing too much. 

Despite higher rates and one of the fastest rate hikes in history, the market is doing well. 

This is because the market is a leading indicator. It looks forward 6 to 12 months down the road. 

And it’s already looking past this, and it’s anticipating the Fed is near the end of the tightening cycle – and an earnings recovery in 2024.

Key Market Insights

What caused the market to go down last year was the Fed tightening cycle. 

And, as a leading indicator, the market has woken up and started pricing in the earnings recovery. 

The market is looking past the current uncertainty to a time when it foresees that we are going to recover – when inflation will be under control, and maybe even that the Fed actually starts to cut rates at some point next year.

Which could be why the market is doing extraordinarily well year to date.

2023 was the 23rd time since 1945 that the S&P 500 was up at least 10% in the first 6 months of the year. 

Historically, if you have double digit gains in the first half of the year, the median performance the last half of the year in those 23 times has been 10%. 

And 82% of the time the market’s been higher. 

The caveat is that the market was down last year. Historically, when the market’s down and the first 6 months of the year are up 10%, the market average is 12% the balance of the year. 

History doesn’t always repeat itself, but there are patterns worth looking at – especially when we get nervous about our investments. 

Another thing to keep in mind is that market corrections are healthy and necessary. It serves as a vital purpose to sift out easy money and build a new foundation for sustained growth.  

Check out the video as Mark Sorensen, our CIO, provides insights into interest rate hikes, AI, and what you need to know about the markets right now. 

It Boils Down to Risk Tolerance

Knowing your risk tolerance is crucial. It helps you determine how much exposure you can handle during market fluctuations. 

Are you willing to endure a 10% or 20% downturn to potentially reap higher gains later? 

Everyone’s risk tolerance is different, and it’s essential to align your investment strategy with your personal preferences and goals.

If you’re nearing retirement or have short-term financial needs, maybe you should be more cautious about having all your money in the market. 

Diversifying your investments and considering your time horizon will help ensure your investments align with your goals.

Take Control of Your Financial Future

401(k) Maneuver provides independent, professional account management to help employees, just like you, grow and protect their 401(k) accounts.

Our goal is to increase your account performance over time, manage downside risk to minimize losses, and reduce fees that are hurting your retirement account performance. 

We review and rebalance your account for you with the goal in mind of keeping you in what is working and out of what is not. 

With 401(k) Maneuver, you can go about your life doing what you love with confidence, knowing we are managing your 401(k) for you. 

See how it works. 

Have questions or concerns about your 401(k) performance? Click below to book a complimentary 15-minute 401(k) Strategy Session with one of our advisors today.

Book a 401(k) Strategy Session

Saving for retirement is critical, but many in their 20s and early 30s put it off. 

It’s easy to see why. It’s not cheap to build a new life, buy a home, or start a family. 

Add in inflation, the high cost of housing, and rising interest rates, and it is understandable why many in this age group put off saving for retirement.

According to Vanguard’s How America Saves 2023 report, the median saved for those under 25 is $1,948. For those 25 to 34, the median saved is $11,357.¹

The fact that you are researching tips for saving for retirement is an excellent start.

There are several things you can do now to get yourself in a better financial place by the time you retire. 

#1 Make a Savings Plan Now

Retirement might seem like a long way off, but life has a funny way of catching up to us – and fast. 

It is important to start making a plan for retirement sooner rather than later. This means taking time to consider what you want your retirement to look like.

Consider the following questions:

• At what age do you want to retire? 
• What do you want your retirement to look, feel, and be like? 
• How much money will you need to have the retirement you want? 
• How much do you need to start saving right now to ensure you will reach your goal? 

Answering these questions helps get a plan in place and gives you an idea of how much you need to be saving each month to reach your goal.

#2 Make Saving a Priority

Unfortunately, when you put off saving for retirement until you are older, you make it harder for yourself to save enough for the retirement lifestyle you dream of. 

The time to start saving is today. Even if you can only contribute $50 or $100 per paycheck.

Do it consistently, and, over time, you’ll be surprised at how much you have saved. 

Starting early and making saving for retirement a priority instead of continuously upgrading your lifestyle also help create better money habits that will serve you through life. 

#3 Get the Company Match

Many companies offer a company match for 401(k) contributions.

For example, a company may match up to 100% of up to 6% of your pay. With a $55,000 salary, you could put in 6% or $3,300 for the year, and the company would match this at 100%.

This means if you contribute 6%, or $3,300 a year, your company will contribute 6%, too.

This is free money! 

[Related Read: 4 Ways to Potentially Maximize Your 401(k) Company Match] 

#4 Build Up an Emergency Fund

In addition to contributing to a 401(k), it is important to build up an emergency fund. 

This is something many Americans struggle with. 

According to Bankrate’s Annual Emergency Fund Report, “68% of people are worried they wouldn’t be able to cover their living expenses for just one month if they lost their primary source of income. And when push comes to shove, the majority (57%) of U.S. adults are currently unable to afford a $1,000 emergency expense. When broken down by generation, Gen Zers (85%) and millennials (79%) are more likely to be worried about covering an emergency expense.”²

But emergencies do happen.

If you don’t have an emergency fund and you need money, it will be tempting to withdraw from your retirement savings.

You don’t want to do this – otherwise you may have to pay taxes and penalties on the withdrawals.  

Instead, allocate some of every paycheck to an emergency fund until you have a good amount saved.

#5 Know What You’re Invested In

Too many investors contribute to a 401(k) each paycheck and go about their lives. 

As a result, they don’t know what they are invested in – or even how their account is performing. 

Get engaged with your retirement savings early on. Ask questions of your plan provider, make sure you are in investments that meet your risk tolerance, and read your 401(k) statements. 

Engagement with your 401(k) helps maximize your retirement savings. 

Watch this video on how to read and understand a 401(k) statement.

#6 Avoid Target Date Funds

A target fund is a fund offered by an investment company that’s structured to meet capital needed at some date in the future, such as retirement. 

The asset allocation of a target date fund is based on a predetermined retirement date. TDFs are structured to automatically reallocate as you move through different life stages.

And, as you age toward your target retirement date, the funds shift toward more conservative investments to protect your money.

For many 401(k) investors, this sounds like a win-win. Invest your money, and let it do its thing until retirement.

But here’s the problem…  

Target date funds were created to take away the hassle of having to research mutual funds in your 401(k) and build and construct your own portfolio.

Instead of having to choose a number of investments and create a portfolio, you can just select a fund that will help you reach retirement income goals.  

It’s no wonder target date funds are so popular with 401(k) plan investors…you set it up and forget about it.

Herein lies the problem.

Because target date funds are based on the date of retirement, they fail to take into consideration that not all investors are created equal.

In addition, target date funds may often underperform in good markets and do a poor job of managing downside risk during tough markets.

[Related Read: 3 Ways Target Date Funds May Hurt 401(k) Investors]

#7 Rebalance Regularly

When you just begin saving for retirement, you may not know that you need to rebalance your 401(k).

Many people set up a 401(k) through work, leave it, and forget it.

This is a mistake. And it can be a costly one. 

Rebalancing a 401(k) simply means allocating assets differently. For example, your 50/50 stocks and bonds may need to shift to 72% stocks and 28% bonds to decrease your risk and increase your returns.

Rebalancing doesn’t require you to save more, but it can make a substantial difference to your 401(k).

[Related Read: What Every Investor Needs to Know about Rebalancing a 401(k)]

#8 Ask for Help

If you’d like to take control of your financial future and potentially have more income at retirement, we strongly suggest getting third-party advice. 

If you’re hesitant to reach out for advice because you are just starting out on your retirement savings journey or you think it’s too costly to get help, don’t let that stop you! 

401(k) Maneuver provides professional account management with the goal to help you grow and protect your 401(k).

Our goal is to increase your account performance over time, manage downside risk to minimize losses, and reduce fees that harm your account performance. 

There are no time-consuming in-person meetings and nothing new to learn, and you don’t have to move your account.

Simply connect your account to our secure platform, and we regularly review and rebalance your account for you, when necessary. 

Check here to learn more about how it works.

If you have questions about your 401(k) or if you need help, we’re here for you. Click below to book a complimentary 15-minute 401(k) Strategy Session.

Book a 401(k) Strategy Session

SOURCES

1. https://institutional.vanguard.com/how-america-saves/
2. https://fortune.com/recommends/banking/57-percent-of-americans-cant-afford-a-1000-emergency-expense/