Audience: Retirement Wellness Basics

Naming a beneficiary

Posted on June 6, 2020 by -

Retirement accounts allow you to name “beneficiaries,” or people or organizations that will receive your retirement savings in the event of your passing.

Selecting beneficiaries is an important step in securing the future of your savings. If no beneficiaries are indicated and you pass away, your retirement account must go through the complicated probate process instead of going directly to your loved ones or preferred organizations.

How to designate a beneficiary. Most financial institutions make the process of selecting beneficiaries easy by providing you with a straightforward form that allows you to indicate one or more desired beneficiaries, and the percentage of money they should receive in the event of your passing. There is typically no limit to the number of beneficiaries you can indicate, so you can allot different amounts to several recipients of your choice. People generally choose their spouse or children; however, siblings, close friends, other individuals, or organizations can be selected as well.

Beneficiary forms usually require some basic information about the intended beneficiaries, as well as their Social Security or tax ID. The requirements to designate a beneficiary or beneficiaries vary by company so it’s a good idea to ask the servicer of your retirement savings about its specific policy.

Why you should review your 401k statement

Posted on June 6, 2020 by -

How to read your 401k statement

Your 401k statement could be overwhelming and filled with incomprehensible jargon, but knowing what to look for can make reviewing your statements a quick and painless process. The layout can vary by company, but they will all feature the same basic information.

Your “account summary” will feature your account balances, the funds, etc. you’re currently invested in (often called your holdings or asset allocation), and a summary of recent transactions.

An “account balances” section should indicate your “return,” or the amount your investments have increased or decreased in value. This may be listed as a dollar value, a percentage, or both. It should also indicate a “starting” or “beginning” balance, which is how much money you started with at the beginning of the statement period (a month or a financial quarter). It should also note any taxable or nontaxable income, which will be of use to you when tax season comes around.

The “holdings” section indicates what you are invested in. This can be stocks, bonds, mutual funds, index funds, or other financial products. Statements vary in the level of detail they provide; some will tell you precisely what stocks you own, while others will simply tell you your “asset allocation,” or what percentage of your money is invested in stocks, bonds, and cash.

Your recent transactions section should indicate any purchases or sales of assets, as well as contributions to and withdrawals from the account. You should keep an eye on this section to make sure nothing strange appears (e.g., large sales of stocks or bonds, selling and then buying the same stock, or cash withdrawals you don’t remember taking).

There should also be a section that exclusively covers “performance,” which reviews how successful your investments have been. This section should provide detailed information about how each of your investments is performing, and compare their performance to that of the market overall (this is usually done by comparing your returns to those of a major index such as the S&P 500).

By staying informed about your retirement plan’s performance, you ensure that your investments are inline with your retirement strategy and that you’re on track to meet your retirement goals. If your plan isn’t performing how you’d like, consider rolling your savings into an Icon IRA. With 100s of investments to choose from and low annual fees, it’s the easiest, low cost way to save for retirement. 

Changing jobs? What to do with that 401k

Posted on June 6, 2020 by -

You can keep the money in your current plan or you can roll it over into a new retirement account. Each option has its advantages.

Let’s figure out the right one for you.

Leave your balance with the old plan. You can keep your money with your current 401(k) plan as long as your balance is at least $5,000. But you won’t be able to make contributions, and you’re still subject to the plan’s rules and limited investment choices. This may be a good option if you’re between ages 55 and 59 ½ and you’ll need your retirement savings soon.

Roll your old plan over to your new employer’s 401k plan. This can be a good move if you’re happy with the new plan’s investment choices and fees. Especially if your new employer offers contribution matching. Find out if your new employer’s plan accepts transfers; not all do.

Roll your old plan over to an Icon plan. You can roll over your old 401k into Icon plan. Be sure to do a direct rollover so that taxes are not withheld. You can continue contributing your retirement, regardless of whether you’re “traditionally” employed.

Cash out your 401k. NOT RECOMMENDED. If you take a “lump-sum distribution,” you will have to pay income taxes on the money. You will also pay a 10% early withdrawal penalty if you’re under age 59 ½. Not only do you lose money, but you lose valuable time in building savings, which you might never catch up.

 

Why you should save early and often

Posted on June 6, 2020 by -

If there is a magic ingredient to successful investing, it’s time. Quite simply, the earlier you start saving, the better.

Don’t make the mistake of thinking that you don’t earn enough money to save, or that retirement is too far away. Even saving a little bit adds up over the long term. So no matter your age, or how much you earn, now is the time to start saving in a quality retirement plan. Waiting even a few months could mean less money in your nest egg when you retire.

Why? It’s all about the power of compounding.

Compounding allows you to make money not just on the money you contribute, but also on the money it earns (the “rate of return”). So if you invest $100 and it earns a 5% return in one year, you now have a principal of $105. The following year, if you also earn a 5% return, you earn it on $105 (not just the initial $100) and you now have $110.25. As your principal grows, your gains will grow, too, compounding your returns. The more time you have until retirement, the longer the magic of compounding can work, growing your savings faster than you imagined.

Even a small amount set aside each month has the power to grow exponentially over the years. Especially when you start young.

** This example assumes an annual income of $25,000 (without increases), 6% contribution, 8%–10% rate of return, and monthly compounding. This chart is for illustrative purposes only and is not intended to represent the performance of any specific investment. Actual returns will vary and principal value will fluctuate. Taxes are due when money is withdrawn.

What’s an ETF?

Posted on June 6, 2020 by -

ETFs are referred to as “funds” due to their similarities to mutual funds. However, ETFs are traded on the stock exchange. Unlike a stock, which focuses on one company, an ETF has a wider range of focus. An ETF is a fund or security composed of a collection of other securities such as stocks and bonds. It’s constructed similarly to a mutual fund, but is traded on the stock exchange. An ETF often tracks indexes and is able to trade throughout the day unlike mutual funds which trade once per day. An ETF has an associated price that allows the purchase and redemption of shares to occur easily.

ETFs are also known for being low-cost investment options. ETFs can consist of hundreds or thousands of stocks and bonds. To obtain that type of diversity, an investor would incur a large number of trading transaction costs and be forced to meet some high minimum purchase requirements in a lot of cases. ETFs can be utilized as a way to obtain that diversity at a low cost. ETFs are less expensive than mutual funds because they do not charge 12b-1 fees or commissions. Therefore, fewer operational expenses lead to reduced expense ratios for the investor.

 

 

 

Thinking of consolidating old 401(k) plans?

Posted on June 6, 2020 by -

Generally speaking, it makes sense to consolidate old 401(k) and 403(b) plans into one place. But there are a couple instances when it might make sense to leave your money where it is. Let’s look at both cases.

Advantages to consolidation:

Simplicity. Having all of your money in one place makes it easier to manage your investments, as you have to pay attention to only one account.

Fees. One account is almost always less expensive than multiple accounts.

Investment freedom. If your money is with an old employer’s plan, you are limited to the investments available in that plan. If you invest in an IRA, you have more choices.

Safekeeping. It’s not uncommon for people to lose track of their old plans.

Why you might want to keep your separate accounts:

Low fees. If your previous employer has a great plan with low fees, it might make sense to leave your savings in their plan, especially if you are nearing retirement.

Tax reasons. In rare cases, there could be good tax reasons to leave your money behind.

To decide if consolidating your retirement accounts is right for you, look at your personal circumstances and consult a tax advisor if necessary.

How high fees erode your savings

Posted on June 6, 2020 by -

How fees and investing are related

The science of behavioral economics can help explain why we think the higher the price, the higher the value. There’s a term called “quality theory” that says people often assume a higher price indicates better quality and a higher long-term return on investment.

But it isn’t always the case. Let’s look at how this theory applies to index funds. Index funds are all similar in terms of how they work and how they’re constructed, yet their fees vary widely depending on the asset manager.

Morningstar offers the following example:

A study on index fund fees showed that there are large levels of fee variation among S&P 500 index funds that are virtually identical in most relevant characteristics. RYSPX and SWPPX, for example, are two S&P 500 index funds with a holding similarity score of 99.99 percent. [3]

Over the past 20 years, based on current fees, if you had invested $10,000 in RSPYX you would have paid $4,475.32 in total fees. On the other hand, if you had invested $10,000 in SWPPX over the same period, you would have paid $101.30 in total fees. This massive difference cannot be attributed to differing underlying characteristics because the two funds share almost identical portfolios. Then what explains the difference? Probably a high expense ratio.

Don’t be fooled by “small” fees

One problem that arises when comparing fees that funds charge, is that said fee amounts can appear to be small, with percentages ranging from 0.50% to 1.0% and 2.0%. But these seemingly small differences can make a huge impact on your savings over time.

Make sure to look at the fees you’re paying on the funds you’re investing in. If you realize you’re paying too much in fees, consider making a change.

Compare the funds’ expense ratios

The expense ratio is the annual cost paid to fund managers by holders of mutual funds or ETFs. The expense ratio for mutual funds is typically higher than expense ratios for ETFs. [1]

What is considered a high expense ratio?

What’s reasonable? According to CNN Money, it depends on the kind of fund. Index funds should have the lowest fees because they cost relatively little to run. For example, you can easily find an S&P 500 index fund with an expense ratio of less than 0.2%. For mutual funds that invest in large U.S. companies, look for an expense ratio of no more than 1%. And for funds that invest in small or international companies, which typically require more research, look for an expense ratio of no more than 1.25%. [2]

 

[1] https://tickertape.tdameritrade.com/investing/fund-expense-ratios-17570
[2] https://money.cnn.com/retirement/guide/investing_mutualfunds.moneymag/index14.htm
[3] http://cff.handels.gu.se/digitalAssets/1561/1561456_halling-paper.pdf
[4] All figures in 2012 dollars. Workers are assumed to begin saving at age 25 and retire at age 67. Example reflects median salary of $30,502 when worker starts saving at age 25. Example provided by CAP.

 

Annuities–What you need to know

Posted on June 6, 2020 by -

Annuities: How they work, and what to consider before purchasing one

There are different types of annuities, but in a nutshell, here’s how an annuity works: You give the annuity provider a large lump sum, say $150,000, of your retirement savings. The annuity company takes total control over this lump sum of money and, in exchange, offers you a contract guaranteeing that you will be paid a set amount every month when you retire.

The annuity company pools your money with that of other annuity holders and places it in long-term investments designed to ensure the company’s ability to pay out the monthly sums guaranteed to all eligible annuity holders.

The allure is that you will receive a stable, reliable income in retirement. But there are several catches.

  1. High fees. Annuity companies tend to charge very high fees (3%-4%) on your money while it’s invested with them. These fees are often hidden or applied in ways that are difficult to decipher on a statement. 
  2. It’s difficult to withdraw your money. Let’s say you become dissatisfied with these high fees and want to get your money back to invest elsewhere. Because your money is tied up in long-term, communal investments that the annuity company relies on, they are extremely reluctant to let you take your money back. In fact, they will usually charge you an expensive “surrender fee” if you withdraw your money (between 10% and 15% of your total invested balance). 
  3. They’re not insured. That means if the annuity company goes broke, you can be left empty-handed, with no way to reclaim your money.

The complexity and risk associated with annuities means you should consider all of your options and before moving forward with one. If you do decide to purchase an annuity, it might be a good idea to keep a portion of your retirement savings in a traditional retirement account like your 401k or an IRA.

Stocks and bonds: The basics

Posted on June 6, 2020 by -

Stocks

Stocks are basically a slice of ownership in a publicly traded company. The value or purchase price of that slice, or “share,” fluctuates with the value of the company. So if you own Apple stock, and Apple is doing well as a company, the value of your share in Apple will increase as the stock price rises. Sometimes you will see stock prices rise and fall based on external factors like domestic policies or international trade, but most often, the value of your share is based on company or CEO performance.

In terms of performance, stocks have historically earned the highest returns over time. But they have more short-term ups and downs in price than bonds and are considered a riskier investment than bonds. Because of this short-term volatility, people generally plan to hold stocks as a long-term investment .

Bonds

Bonds, on the other hand, are very similar to traditional individual loans. Just like individuals, companies and governments take out loans to invest in projects or to make large, essential purchases. Unlike individuals, companies and governments may take out these loans by asking the general public to lend them money in the form of a bond. Owning a bond is equivalent to owning a piece of a company or a government’s debt. In return, the company agrees to pay back the initial value of the bond plus interest, just as you might pay back interest on a car or home loan.

Bonds have historically earned lower returns, but those returns are guaranteed and bonds as a whole experience fewer ups and downs than stocks. Because of this, they’re considered a safer investment than stocks.

Which should you buy: stocks or bonds?

You always want to have a balanced portfolio but as you develop your investment strategy, you want to weigh your appetite for risk against the amount of time until you retire. Generally speaking, setting aside a greater allocation for riskier investments with a bigger upside is advisable when you’re younger, because if you lose big, you have time to make up your losses. But if as you’re nearing retirement, you want to shift to safer investments to safeguard the savings you’ve built.

 

Why Asset Allocation Matters

Posted on May 30, 2020 by -

Asset allocation–An overview

The combination of stocks and bonds in your retirement account is known as your “asset allocation.” An example of an asset allocation would be 50% stocks and 50% bonds, or 70% stocks and 30% bonds, or any combination thereof.

A good way to think about different asset allocations is in terms of the risk they carry. When we talk about “risk” in the world of investments, we are fundamentally referring to how much a given investment changes in value over time. 

Some asset allocations can carry more risk than others (such as 100% equity), meaning they are more prone to shift up or down in value, but they may provide a better return over time. Other asset allocations may be more stable and less prone to large swings in value, but they might not grow in value very quickly. Since your needs will change over time (especially as you transition into retirement), your asset allocation will need to change as well.

Why would I use more Stocks or more Bonds?

Stocks, or equities, have historically offered the highest risk and highest returns. But not all stocks are the same. Large-cap stocks are less risky and small-cap stocks have more risk. Investors willing to deal with the volatility of stocks usually realize the best positive returns over time.

Bonds have historically had less volatility than stocks, but the trade off is that they offer more modest returns. There are some types of bonds that are riskier such as junk bonds and high-yield bonds. Investors with a short time horizon often keep their investments in bonds since they offer stability and regular income.

Many mid-career investors prefer riskier asset allocations that frequently shift in value, but have the potential to grow their account value substantially while they have non-investment income. As they get closer to retirement, these types of investors then transition to more conservative allocations.

Are there other factors that influence my asset allocation?

Yes, “time horizon” and, “risk tolerance,” are two main factors that will affect your asset allocation. 

Your time horizon is the number of months or years until your financial goal. Investors saving up for retirement often invest in riskier assets since they have a long time horizon, while a parent saving for a teenager’s college education may stick to less risky investments since they have a shorter time horizon. 

The second major factor influencing asset allocation is an investor’s risk tolerance. In other words, his/her ability and willingness to lose some or all of the original investment in exchange for greater returns. Aggressive investors may be willing to take on higher risk to get better returns, while conservative investors may stick with low-risk investments aimed more at capital preservation.