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If your employer in Cleveland, Ohio sets up a 401k for you, jump at the chance to start saving and take advantage of any matching contributions through your company. Not using your 401k and matching options is like leaving free money on the table.
If you have a 401K in Cleveland, Ohio then you need to read this! Below are 10 Steps to 401K Success in Cleveland, Ohio! Contact State Street Adviser for more information: (614) 895-2584
The dollars in your 401(k) plan may represent 20-80% of your income at retirement. The government, and by extension, your employer, are giving you the opportunity to take advantage of two very powerful financial concepts: the ability to save money on a pre-tax basis, and the tax-deferred, compounded growth of those dollars. A 401(k) may enable you to build a better nest egg than anything else you can do on your own because of that tax-deferred growth. Saving money before it is included in your taxable income reduces your annual tax bill. In addition, the earnings can grow on a tax-deferred basis, meaning you can earn money on your earnings! If your company offers a 401(k) plan, you need to be contributing, as soon as you can, and as much as you can. It is the first step in taking charge of your financial future.
In order to help you increase the size of your nest egg, as well as to encourage reluctant employees to save for retirement, many employers offer matching funds. The average employer offers a match of 50% of the amount you contribute up to 6% of your eligible salary. In the complex world of finances, we call this free money. If your employer is willing to give you money, you need to take it!
The only catch is that you must contribute some of your own money in order to receive the company match. If your employer matches up to 6%, you should be contributing at least 6%. The goal is to capture the entire company match (and then keep working there until you’re fully vested). As your financial adviser, State Street Adviser can help you with your 401K investing strategy in Cleveland, Ohio. For more information call us at (614) 895-2584
2. Determine your investor profile
Investor, know thyself! Every investor is different and knowing yourself is the first step to allocating your investments appropriately. Before you can determine your asset allocation strategy, you must first be able to clearly define your goals. Remember, 401(k) money is retirement money and everybody has different dreams about what their retirement will entail – traveling, boating, etc. Also, you may have some pre-retirement goals for which you need to save some money. Each goal may represent a separate pool of money and there are different investment options available to you to help fund each goal. Second, determine the time horizon for retirement. Is it more than 10 years away? In general, the longer you have until you need the money, the more heavily weighted you should be in stocks. You’ll have more time to recover any losses incurred during a market downturn. The third consideration concerns how psychologically comfortable you are with those market downturns. Will you really be able to tolerate the inevitable ups and downs that the stock market delivers? Do you need help determining your investor profile for your Cleveland, Ohio 401K investing strategy? Contact State Street Advisers for if you need help!
3. Allocate appropriately
Asset allocation is the principle of deciding how to spread your investments across various asset classes, such as stocks, bonds, and cash. There are subcategories within each class, such as small, medium and large cap stocks. The idea is to diversify your holdings in order to potentially increase returns while diminishing risk. A variety of factors determines the appropriate allocation for each individual – When you need the money (not automatically dictated by your retirement age), how much money you have now and expect to need later, what kind of risks you’re willing to take, and what other assets you have invested outside of your 401(k). Perhaps the most important factor is your time horizon – the more time you have, the more aggressive you can be.
4. Limit exposure to company stock
Company stock can be a double-edged sword. On one hand, as a loyal employee who understands the business, you want to participate in the growth of the company by being a shareholder. On the other hand, it is risky to have too much of your portfolio in one stock. Having too much money in a single stock issue creates a non-diversified portfolio. Most investors are able to reduce volatility significantly by having a diversified portfolio. Besides, do you really want the fortunes of one company to control your salary, benefits, pension and your 401(k)?
5. Reallocate tactically
While it is not advisable to move your money around daily (market timing in general has not proven to be an effective strategy over the long haul), it is advisable to look at what your investments are doing from time to time. If one segment of the market has outperformed other segments significantly, then your portfolio is likely to be significantly out of balance. In other words, if you wanted to have 70% of your money in stocks, and it has grown to represent 80% of your portfolio, you need to rebalance your portfolio. You may also need to consider other strategic moves if your mutual fund suffers from style drift, there’s a change in management, or if a similar fund with lower expenses becomes available. Take a disciplined approach to monitoring your investment portfolio. Do you need help with your tactical 401K relocation and investment strategy in Cleveland, Ohio? Then contact us now and we can help!
6. Do not panic
Listening to the evening news, and hearing about the market changes on a daily basis, can cause even the most stalwart of investors to get nervous occasionally. Stocks fluctuate in value, it’s the nature of the beast. Just remember that you are investing in your 401(k) for the long term. Although there are no guarantees that this will continue in the future, the direction of the stock market over the long term has been up. There will continue to be downward dips and swings, which is why knowing how you’ll react to those swings is a factor to consider in your overall asset allocation. Selling when your investments are down is the best way to lock in your losses. Try to remember that patience is a virtue. Unless you believe that the investment cannot recover, it is usually better to hold on for the ride. In fact, it might be a good opportunity to buy more!
Don't panic, contact State Street Advisers for all your Cleveland, Ohio 401K investment questions!
7. Know your plan features
Every 401(k) plan has unique characteristics. To help maximize your plan, you need to know all your options. Your plan documents, distributed by your benefits department, will outline options such hardship withdrawals, loans, vesting schedule, limitations to moving money, and in-service withdrawals. Read this document carefully or have a financial professional review it with you.
Most plans allow for hardship withdrawals. There are several tax and penalty issues associated with hardship withdrawals, so make sure you read your plan documents carefully and seek professional guidance. If you use the option for hardship withdrawal, you may be suspended from the plan for a specified period.
The vesting schedule refers to the years of employment before the company match money becomes yours. Vesting schedules either are graded, meaning you get a percentage of the money in successive years of employment; or cliff, meaning you get all the money at once after no more than five years. Keep the vesting schedule in mind if you are thinking about quitting your job. If you need help understanding your 401K investment in Cleveland, Ohio, then contact State Street Advisers and we will help you understand your 401K plan!
If the plan does not meet your investment needs, and it allows for in-service withdrawals, you can move some of the money into other vehicles, such as an Individual Retirement Account (IRA). An IRA gives you many options for investing your money, thereby enhancing your diversification abilities.
8. Borrow judiciously – if at all
Early 401(k) plans had no provision for loans. Providers added most loan provisions as an incentive to encourage greater participation – participants would be more likely to save for retirement if they could access the money before they retired. This does not make loans an attractive feature! Many people believe (often erroneously) that if the interest rate on the 401(k) loan is less than they would have to pay elsewhere, the 401(k) loan is a good deal. That may be, but it does not take into consideration the real cost of the loan – the lost opportunity cost. The money in your plan cannot grow if it is not there! If the investments in your plan are growing by 12%, that is what borrowing from the plan costs you, plus growth on that growth. Another consideration needs to be the tax consequences of borrowing from your plan. While you do not pay any taxes on the money when you borrow it, you do pay the loan back with after-tax dollars. Then, when you begin to take withdrawals at retirement, you pay taxes on those dollars again – you are paying taxes twice. If you do some calculations, you may find that borrowing from your plan is an extremely expensive option. Borrow only if you must. Contact State Street Advisers for 401K investing services and we will be happy to help you get a better understanding of borrowing!
9. Consider tax consequences of your actions
Most of the things we do in our financial lives have tax consequences. In the case of the 401(k), you can avoid several negative tax consequences. If you leave your current employer and want to take your 401(k) money with you, be sure to roll it over directly to an IRA or to another employer’s plan. You may leave it in your former employer's plan only if you have more than $5000 in your account. If you take a full distribution, you will pay federal and state taxes on the entire amount. If you are not yet 59 ½, you also will pay a 10% penalty. This could reduce your lump sum distribution to almost half its original value. It will not help your retirement nest egg. Do not take a lump sum at retirement, unless you need all the money at once. Take out only what you need, so the bulk of the portfolio can continue to grow tax-deferred. If you are over 72, you must follow the Required Minimum Distribution rules. Rolling your money from your 401(k) to an IRA may make sense for a variety of reasons, and fortunately, an IRA rollover is not a taxable event. Do you want more information or consulting about 401K taxes in Cleveland, Ohio? We can help!
10. At retirement, balance your needs for income and growth
Most people should disregard the notion that when you retire you should move all your money into bonds and stay clear of the stock market. Inflation, even when it is under control, has a nasty way of ensuring that a dollar in the future will not buy what a dollar does today. You must ensure that your investment holdings have the potential to outpace inflation, so that the income you receive from your investments can have the same purchasing power when you’re 85 as it does when you’re 65. This means you should have a portion of your money in investments that have the potential to outpace inflation, such as stocks, regardless of your age. Now that you have all the information, you need, let us know if we can help you further. State Street Adviser will help you with your 401K investment strategy in Cleveland, Ohio. Give us a call at (614) 895-2584 and we will talk!
Rebalancing may be a taxable event. Before you take any specific action be sure to consult with your tax professional.
Asset allocation is an investment strategy that will not guarantee a profit or protect you from loss.
Consider all available options, which include remaining with your current retirement plan, rolling over into a new employer's plan or IRA, or cashing out the account value. When deciding between an employer-sponsored plan and IRA, there may be important differences to consider - such as range of investment options, fees and expenses, availability of services, and distribution rules (including differences in applicable taxes and penalties). Depending on your plan's investment options, in some cases, the investment management fees associated with your plan's investment options may be lower than similar investment options offered outside the plan.
A diversified portfolio does not assure a profit or protect against loss in a declining market.