Last Week’s Question of the Week: If you wait to collect your social security past your full retirement age, what percentage will your benefit increase per year? Is it 3% or 8%?
ANSWER: Your benefit can increase up to 8% per year until you start taking benefits.
HOST: One area I think you assist your clients is helping them understand their retirement plan at work and how to maximize it, do you agree?
KLAAS FINANCIAL: Yes, this a big area that we work with clients who are serious about their retirement planning. So first, we look at what plans they have available to them.
- Do they have a 401k, a 403b or 457 plan? If not, do they have an IRA they can contribute to? What we are trying to find is ways that we can put away the most amount of money into retirement accounts, either pre-tax or post tax. MAXIMIZE contributions when possible!
- Is there a match to your contributions? Perhaps your employer offers a match up to 3%… which means that you need to save at least 3% to receive the free money! DON’T miss out on FREE MONEY!
- Also, many people start saving for retirement later than they would like. We discuss the catch-up provisions that are allowed for when you are 50 or over. For example, if you are saving into an IRA and you are over 50 you can put away $7000 in 2019, which is $6000 per year with a catchup of an extra $1000. If you are under 50 years old and saving into a 401k or 403b, you can contribute $19,000 in 2019, plus an extra $6000 for those who are over 50, for a total of $25k that you can put away.
- We look at if there will be a pension when they retire and possible choices that they may have to consider for the continuation of that pension if they should pass away.
HOST: Can you explain what a Target Fund is in our 401k? Is that a good choice to save into?
KLAAS FINANCIAL: Looking at investment choices within your retirement plan at work is important. Making sure you are taking an appropriate amount of risk for your age, temperament, years till retirement and your OWN circumstances.
We know that saving for retirement is never easy, but target-date funds can eliminate the guesswork in choosing your 401(k) plan investments. They offer one-stop shopping and set-it-and-forget-it investing — just what most people should be looking for. Rather than choosing a mix of stock and bond mutual funds, you select a single fund designed to have the right combination of assets based on when you plan to retire — your “target date.” Interesting Note: About three-fourths of large 401(k) plans offer target-date funds to their employees.
Some Facts Regarding Target Funds:
FACT 1: Your investment choices are limited. Within a 401(k) plan, you might be offered target-date funds from a single company. If you have no choice, you can’t shop for the fund with the lowest fees. And even if the fees are reasonable, they may be higher than what you’d pay by investing in the fund’s individual components on your own.
FACT 2: Target-date funds don’t guarantee a return. Even in an ideal world, where every target-date fund was composed with investors’ best interests in mind, you’d still risk losing principal. That’s true anytime you go beyond low-risk investments like CDs and savings accounts. Many investors don’t understand that. In a survey commissioned by the Securities and Exchange Commission, 30% of respondents indicated they think target-date funds provide guaranteed income, while 15% said it depended on the fund and 20% said they didn’t know. It’s important to know what investments a fund holds and what their underlying risks are. Broadly speaking, domestic stocks are riskier than bonds, and international stocks are riskier than domestic stocks. Looking at how a fund is allocated to these asset classes will give you an idea of how much risk it takes. And funds with the same target date will perform better in some years and worse in others compared with their peers, based on how their underlying investments perform.
FACT 3: The fund may take too much — or too little — risk. When evaluating a target-date fund, you need to understand its glide path, or how the fund’s asset allocation is supposed to change as you age. An example of how a fund’s glide path works: It gradually shifts your asset allocation to include more bonds and short-term funds and fewer stocks. Example: Say that you reach retirement in 2055, you’ll hold about 40% domestic stock funds, 15% international stock funds, 35% bond funds and 10% short-term bond and money market funds. That allocation continues to become more conservative during your retirement years.
HOST: So, what if I find out I do have choices in the type of 401k I can save into, say Roth or Traditional? What should I do? How much can I put away?
KLAAS FINANCIAL: That depends.
So, where to save into is a question regarding possible taxes in retirement that we look at given probably income flows and potential tax rates. Sometimes it seems clear for our younger clients to move towards Roth 401ks, but for some, due to high incomes and current taxes, they prefer and need the tax benefit today.
So how much should you be putting away? Probably as much as you can afford to. Kiplinger’s just released a figure in March of 2018, that Americans have stashed away $26.6 trillion in retirement savings.
If you get a raise, it is always a good idea to increase your retirement savings by a few percent. In our experience, most people DON’T say that they have too much money when they go to retire! Especially for those who do not have a pension to fall back on.
Catch C.J. Klaas and Maleeah Cuevas on Money in Motion every Thursday on Madison's 1310 WIBA from 8:05-8:35am.