Ask these 401K questions to make sure your portfolio is on track to reach your retirement goals
401K plans are easily the best return you’ll ever get investing but most employers do a horrible job at answering your questions. That means you could be wasting money and a valuable opportunity to make your retirement investing work for you.
By the end of this video, you’ll have your 401K questions answered and will see exactly what you need to do to get your nest egg back on track. I'll also reveal the average 401K balance by age and the risk in looking at the averages.
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What are the Most Common 401K Questions?
Now we already saw some of the worst 401K mistakes in last week’s video and got a glimpse at those tragic 401K average balances. More than seven million retirees are living in poverty according to a study by the Kaiser Family Foundation and tens of millions are just barely scraping by.
I got a lot of 401K questions after that video so I wanted to make this one to answer your most common questions, talk more about the average balance by age and show you how you can catch up even if you’re already behind on your retirement investing.
For those in the community, following the channel, you know I’m a huge fan of 401K investing. I spent more than a decade as an investment analyst and wealth manager and can tell you the decision to invest in your company’s 401K is the best you’ll ever make.
That company match on your contributions is like free money and it is without argument the highest return you can get anywhere in investing.
This is the second of our three-part video series in partnership with Blooom on 401K investing. Now Blooom is an independent 401K manager that works with your existing retirement account. You can connect your 401K account and Blooom’s software will show you the investment fees you’re paying, and how to get back on track.
I’ll tell you more about Blooom later and share a special offer to get your free 401K health analysis but first I want to get to your 401K questions. I’ll cover the five most common questions but if I don’t answer yours, scroll down and ask it in the comment section and I’ll answer it personally.
What is a 401K Plan?
The most common 401K question I get is just about those basics of the program, what is a 401K. This is a special retirement investing account set up by your employer with a plan administrator, usually an investment company. The plan includes a list of stock and bond funds in which you can invest. You set up how much you want to invest regularly and that money comes out of your check before taxes are taken out.
Besides that pre-tax benefit, most companies will match a portion of your investment. So a typical company match is your employer will put in another half of what you put in up to 6% of your total salary.
These are two huge benefits of a 401K plan, that tax benefit and company match.
What is 401K Vesting?
Another common 401K question is around vesting, what it is and what does it mean. The vesting schedule is how much and when you get to keep the money your company puts in the account for you as a match.
I know, it sucks that you don’t get to keep all your company’s match immediately. You’ll always keep everything you put into your account but the company’s match is yours gradually. It’s just a way for the company to keep people around longer.
For example, we see the vesting schedule for workers at Sprint. So if you are a Sprint worker and contributing to your 401K account, the company matches half of your investment up to 4% of your salary. If you make $40,000 a year, the company will match 50% of your contributions up to $1,600 so they’ll put in another $800 a year.
Sprint will put its match amount in every time you invest but according to this schedule, if you leave the company after a year then you only keep 33% or a third of what they put in. If you work two years and leave then you keep two-thirds or 66% of what the company put in.
This is actually a really nice vesting schedule. When I was an economist for the State of Iowa, the 401K vesting spread out over decades so it took much longer to keep all the employer match.
How Much Should I Invest in My 401K?
Our third 401K question was How Should I Invest My 401K?
Now that’s really the million-dollar question right?
This is one of the big 401K mistakes we talked about in the last video, being too aggressive or too conservative in your 401K investments. Too aggressive and you set yourself up for huge losses in the next market crash. Too conservative and you won’t reach your goals.
I’ve got a video here on the channel about how your investments change as you age but this is really where that free 401K checkup from Blooom comes in handy.
The Blooom software will look at your 401K investments, your age and goals and will show you exactly where to adjust your money to reach those goals. Not only that but it’s also going to uncover the hidden fund fees you’re paying. It’s all free and takes less than two minutes to check your 401K.
Should You Borrow from Your 401K Plan?
The fourth 401K question here is a huge one, Should you borrow from your 401K plan?
Short answer, no!
Taking a loan on your 401K account might seem like easy money to pay off debt or whatever but it comes at some very high costs. First, you’re paying the money back with interest and with after-tax dollars so you’re just destroying those sweet tax advantages with 401K investing.
A lot of plans also don’t let you contribute while you’re paying back the loan so that could be a very long time you miss out on the benefits like a company match and tax-advantages. Worse still here is the fact that you could be up for a 10% penalty and taxes if you can’t repay the loan or leave your job before it’s paid.
What are the Average 401K Balances by Age?
Our fifth question we got was, How much should I have saved and how do I get back on track with my 401K? so that’s why I wanted to go back to those average 401K balances by age and give you a few tricks to help grow your nest egg.
Now we saw from the Fidelity survey the average retirement balances by age, so you see here that the average 401K account is about $167,700 for people age 60 to 69. The red bar here is how many times your salary Fidelity recommends you have invested by that age.
Someone between the age of 40 to 49 they say should have about three and a half years’ worth of their salary saved by that point.
There are a couple of huge warnings here with both of these numbers, the average 401K balance and that recommendation for how much you should have saved.
First, if you’re comparing your 401K balance by the average here, you might already be off track. That’s because most people are tragically under-invested for retirement. That $167,000 average balance in your 60s is only going to provide around $560 a month in retirement if you’re withdrawing 4% – so that is definitely not a target you want to aim for.
Second here, and while I like the simplicity of Fidelity’s target for how many years’ worth of salary to save, it’s not the kind of personalized advice you need.
This is 30+ years of your life you’re planning. Do you really want to leave it to a rule of thumb or quick guess on how much you need? No, you want to save for your personal goals and that bucket list you always wanted to do in retirement.
How to Get Your 401K Back on Track
So actually sit down and write out a story around your retirement. What do you want to do and what does life look like. This is not only going to help you put a number on your expenses but it’s going to make your goals real. You’re going to have a mental picture of retirement that will be your motivation to keep saving even when your budget gets tight.
That’s your first tip for getting back on track, just knowing exactly what your goals are and finding that motivation you need to save.
Then, and this is another of the big mistakes we saw in the first video, you’ve got to watch those hidden fees in 401K plans. Between load fees, annual management and other costs, these fees can cost you hundreds of thousands over decades of investing.
In fact, Forbes found in one study that a difference of just 0.93%, less than 1%, in fees can cost a single investor up to $215,000.
Besides saving on the money you’ve already put in, you can also put more money in once you reach 50 years old. These are called catch-up contributions and in 2018 you’re allowed to put another $6,000 a year into your account and get those tax benefits once you reach 50. It’s a great way to build your nest egg just before it’s ready to hatch.
Blooom is going to help you answer a lot of these questions and maybe more importantly find those hidden investment costs in your 401K plan. The website is offering a free 401K checkup. It takes less than two minutes to connect your 401K and the software is going to show you where you’re investing, how to adjust your investments according to your personalized needs and all the hidden investment fees in your plan.
It’s totally free and there’s no obligation after the checkup so click through and see how you can put your retirement investing back on track.
I’m going to do a complete review of Blooom in our last video of the 401K investing series including how to put your 401K plan on auto-pilot so you never have to worry about it again. I’ll walk you through the website and show you how Blooom can help put your retirement investing back on track, all in our next video so make sure you don’t miss it.