Get Your 401(k) On Track

The median 401(k) balance for people nearing retirement is $149,400, enough to provide a mere $9,000 annually in retirement, according to the Wall Street Journal. Try living on that, even if you add Social Security.

Need to do better? Resolve to use your 401(k) benefit for all it’s worth. You’ll typically find 401(k) investments in these asset classes:

1. Bonds: short-, intermediate-, and long-term. Bonds also are classified by investment grade, such as “high-yield” investments in “lower-quality” bonds
2. Large cap equity funds: growth, value, or a blend of growth and value
3. Small cap companies: growth, value, or a blend
4. Mid cap companies: growth, value, or a blend
5. International companies: growth, value, or a blend. There also are “global funds” and “developing-market funds” internationally.
6. Real-estate funds
7. Socially responsible funds
8. Money market accounts (MMAs) and other fixed-return investments, such as guaranteed investment contracts (GICs)

Learn about your investment options by studying your 401(k) plan’s enrollment books and by looking at the past performance reports on investment funds within the plan. At the same time, always recognize that past performance is no predictor of future performance.

If you don’t have a lot of investment experience, target funds and lifestyle funds offer a quick way to invest in a diversified portfolio.

Once you choose a strategy and pick a mixture of stock funds, bonds, and fixed investments, it’s up to you to follow your 401(k) statements closely and reallocate your blend of funds every six months or at least yearly.

And if you need help planning for your retirement, talk to a Hopewell Federal Credit Union investment adviser to get on the right track.

 

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401(k) Hardship Withdrawals: Know the Stakes

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A sudden job downgrade, not being able to keep up with mortgage payments, or an expensive medical bill could leave you desperately looking for an immediate source of income.

Your 401(k) should be the last place you look for quick money. But if you’ve exhausted all other options, and your employer plan allows hardship withdrawals, you might have no choice but to tap in to your 401(k) retirement plan to help ease your financial burdens.

Before you do:

* Comb the fine print in your 401(k) plan to find out what qualifies as a hardship. Usually it must be an immediate and heavy financial need pertaining to certain expenses.
* Find out if you are eligible to take a hardship withdrawal. The IRS says you must exhaust other, specific options first.
* Learn how much money is available to you. It’s usually restricted to the amount you have contributed to the plan, without earnings, but not always.

Be aware that:

* For at least six months after you receive the withdrawal, you may not make new pretax contributions and you’ll miss out on all or some employer matches during that time.
* You will have to pay taxes on the amount you receive, based on your tax bracket.
* If you’re younger than 59½ years old, you will have to pay a 10% early withdrawal penalty.
* In addition to the penalty, your plan might charge a fee to take a hardship withdrawal.

Don’t go into this without understanding the consequences. First and most important is that you’ll forgo the compound earnings you’d otherwise enjoy in retirement.

To drive this home, say you are 30 years old, in the 25% tax bracket, and want $10,000 to pay for your tuition this year. You will have to pay an employer withdrawal fee, an IRS early-withdrawal penalty, and taxes; and you’ll have to stop making elective deferral contributions for six months. The end result: You could come short approximately $194,000 when you retire–assuming you miss a 7% annual rate of return.

In some situations it is worth taking the hardship withdrawal, but it should be your last resort. Consult with your HR department and your tax and financial advisers; and evaluate your alternatives with a Hopewell Federal Credit Union loan officer.

Mark These Key Birthdays in the Coming Years

If you’re in the middle years of life, you remember reaching Sweet 16, turning 21, and enduring over-the-hill jokes on your 40th birthday. When we approach 50, we look ahead to key birthdays–or half-birthdays–related to our retirement planning. At specific ages, we can or must take certain actions.

Age 50: At 50, it truly hits us that retirement is around the bend. This is a good time to consider long-term care insurance, as it will be more costly when you’re older. Also, pay down debts and begin to think about how you’ll take your pension plan payouts.

Age 55: You can withdraw funds from your 401(k) or other qualified plan at 55 without paying a 10% penalty tax for early withdrawals–if you’re leaving your current employer. You’ll pay taxes on withdrawals.

Age 59½: At this age, you can withdraw funds from your regular IRA, 401(k), or other qualified plan without paying penalties. Again, you pay taxes on withdrawals.

As with 401(k) or other qualified plans, you can take early penalty-free withdrawals from your regular IRA, too. But the rules are more complicated.

You must take those IRA withdrawals–which can begin at any age–as “substantially equal periodic payments” that continue over a five-year period or until you reach age 59½, whichever happens later. Beginning withdrawals at 57, for example, means you’d have to keep taking them until 62, or face penalties.

Early withdrawals from IRAs or qualified plans are best reserved for emergencies. In fact, don’t rush to withdraw funds just because you reach age 59½. The longer you leave that money tax-deferred, the better.

Age 62: Now is the time to decide whether to take early Social Security benefits. Doing so will mean smaller monthly checks—for the rest of your life-than if you waited until full retirement age. But you likely will get checks for more years by starting early. What’s the best move? It depends on your health, expected life span, and finances.

Ages 65 to 67: This is the full-retirement-age spectrum for Social Security benefits, depending on when you were born. Or you could wait until age 70 to start taking benefits and get bigger monthly checks.

Whenever you’re retiring, sign up for Medicare three months before you turn 65. Signing up late means you’ll pay higher premiums for Medicare Part B.

Age 70½: This is when you must begin taking required minimum distributions from your regular IRA, whether you’re working or not. If you’re in a 401(k) or other qualified plan and you’re still working at 70½, you can wait to take your first minimum distribution in the year you retire, if your employer allows that.

Failure to take your distribution results in a hefty penalty: 50% of the difference between what you should have taken and what you actually took. You must take your first required minimum distribution by April 1 in the year after you turn 70½. From then on, the distribution deadline is Dec. 31 each year.