Financial Planners: Is Your IRA Feeling Neglected?

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Contributed by Herb White, CFP, Life Certain Wealth Strategies

If you are like most people, your IRA isn’t getting enough attention. It may sit neglected until you get your quarterly statement and then it’s forgotten again for another three months. Yet there is plenty you could be doing with your retirement holdings to ensure a bright retirement. Take the opportunity now to renew your relationship with your 401(k) and make it your best friend.

This relationship is more important than you may think.
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The news is that the average U.S. employee will need more than 15 times their final pay in retirement resources (including personal retirement savings, employer-based retirement savings and Social Security) to maintain their current standard of living during retirement, according to Hewitt Associates. Furthermore, four out of five workers are still expected to fall short of meeting all their financial needs in retirement unless they take immediate action to improve their savings habits or retire at a later age, Hewitt says.

Another important relationship you should be having is with your financial advisor. It doesn’t matter if you believe your investments are falling behind or if you’ve never even started investing for your future, make time to consult with a financial planning professional to ensure your work-related retirement savings complement your personal saving and you are on course.

Here are some suggestions related to your 401(k) or other retirement accounts.

Do’s and Don’ts for Your IRA

* Do try and contribute the maximum. In 2010, the maximum 401(k) contribution will be $16,500, and those 50 and older can make an additional catch-up contribution of $5,500.

* Do continue to save even if your company has discontinued matching. Matching 401(k) funding is a great benefit but many employers had to retract that help during the recession, leaving employees to pick up the slack. Do this as best you can. The benefits you will gain from making pre-tax contributions to your traditional 401(k) will continue. Did you know that when you have money automatically taken from your paycheck you are “dollar cost averaging”? This is a smart way to invest, because the fixed dollar amount that comes from your paycheck buys more shares when prices are low, and fewer when prices are high. Thus, your average cost per share is lower than the average price per share.  

* Don’t delay if your new employer doesn’t enroll you. Do it yourself. About 40 percent of U.S. employers automatically enroll workers in their 401(k) plans and nearly 83 percent of U.S. employees have some money in those plans, according to the Profit Sharing/401(k) Council of America. You need to join, even if your company doesn’t match—the tax advantages are too significant to pass up.

* Don’t wait for your new employer’s enrollment period to come around. Many companies don’t let you join the 401(k) until you’ve been working there a year. Get in the habit of putting money away for retirement anyway. You can start an individual IRA with the funds you would have put in the company plan, or you can set aside money in a savings account to supplement your cash flow and put that amount into your 401(k) once you’re allowed to join.

* Don’t rely on your 401(k) alone. There’s room for another relationship and 401(k) plans shouldn’t be relied on as your only source of retirement dollars, especially if matching lags for a while. You must invest outside your company plans.

* Do get advice about your 401(k) funds when you leave an employer. Ask about restrictions and avoid any slip-ups.

* Do keep track of 401(k) accounts left behind at former employers. Maybe you’ve changed jobs several times and never got around to moving older, smaller 401(k) accounts from past employers to current ones or into a self-directed retirement account.

* Don’t over-invest in company stock. Most financial planners advise that you put no more than 15 to 20 percent of your whole 401(k) portfolio in company stock.

* Don’t even think about borrowing from the 401(k). It is growing tax-deferred and each dollar pulled from the account means a greater loss down the road. If you do withdraw funds and fail to pay back the money, you could face income taxes and penalties. Instead, get started now on a separate emergency fund of three to six months of living expenses you can draw from.

* Don’t cash out. Some workers think it’s a great idea to treat a 401(k) as “found money” when they quit a job and go out and spend it. Don’t do it. You’ll pay huge penalties and lose your retirement savings momentum.

* Don’t take the details of your account for granted. Read the fine print. If you notice big changes in your employer’s funds and options, ask your advisor or HR department to take a look. With recent regulatory changes, new fees and charges that once were invisible coming out of investors’ pockets, caution is a good idea.

* Do be smart about your allocations. That means routinely assessing them. Does your asset allocation fit your age and retirement goals? As we age, we generally need to put less money in volatile investments like stocks and more in conservative investments.  Also, have you experienced a major life event, such as starting a family, going through a divorce or losing a spouse? That is another good reason to re-evaluate your retirement numbers. If you’re behind on your retirement goals, you will probably have to take on a bit more risk, but it’s wise to get a financial advisor’s help on this. As an investor, you wouldn’t want to be left out of a market upswing when you have catching up to do. But you also wouldn’t want to be overexposed in volatile investments when the market heads down. Get some advice.

Courtesy of Herb White CFP, MBA, a Certified Financial Planner™ with Life Certain Wealth Strategies 8400 E Prentice Ave #715 Greenwood Village, CO 80111 (303) 793-3999,. Securities and investment advisory services offered through Woodbury Financial Services, Inc. Member FINRA, SIPC and Registered Investment Advisor.  Life Certain Wealth Strategies and Woodbury Financial Services are not affiliated entities. This article is for informational use only and should not be construed as investment advice. .

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