On July 15, Bud Green, a retirement plan consultant from SageView Advisory Group, provided an overview of 401(k) plans including information on plans available to TAG members. Green’s presentation included what types of plans to choose at specific ages, what to invest, taxes, the market, and more.
Your goal should be to have enough money in place by the time you retire so that continuing to work is a personal choice and not a financial choice. The purpose of a 401(k) is to generate inflation-protected income for the rest of your life. It is long-term money, your own personal pension plan, separate from your company pension plan.
Factors that affect saving
Beyond your control:
- Market returns
- Government policies
Within your control:
- How much to save
- How much to spend
- How much risk to take with investments
When to start saving
- The earlier you start saving money, the more power it will have.
- As you get older and make more money, life gets more complicated, expenses increase, and it’s not necessarily easier to save money.
How to start saving
Decide how much you want to put into a plan to begin with
- A 401(k) has annual contribution limits
Decide on Roth or Pre-tax investments
- About 90% of investors make pre-tax contributions
- If you contribute but defer taxes, you are not taxed on the amount you are contributing to the plan. Thus, you get a tax break on the way in. The money builds up on a tax-deferred basis. When you retire and take the money out, it’s all taxed then as ordinary income.
- The idea behind this is that you’re going to be in a higher tax bracket now than when you retire.
- With a Roth you want the tax break later and assume you will be in a higher tax bracket later.
- Cases to be made for this are strained government systems (Social Security and Medicare) coming down the road, leading to higher tax rates.
*This is not tax advice. Speak to your CPA to fully understand which route you should choose.
How does age influence contributions?
Green suggests:
- If you are under 30, do all in a Roth.
- If you are under 40, do at least half in a Roth.
- If you are over 40, contributing to a Roth is not advised and depends on when you plan to retire.
401(k) investment options
Ask yourself the purpose of your money when choosing:
- Cash/Money market: For 4-5 years from now, keep money in the bank at fixed interest rates.
- Bonds/Mutual funds: For more than 4-5 years, hop over into the investment world and accept a small risk.
- Stocks/Estate: For 8-10 years out, investment portfolios and real estate take advantage of the growth of the economy. You want a rate of return that’s over the rate of inflation. These are higher powered over time.
- All-managed portfolios
- Example: Vanguard Target Date Fund
- You choose your date of retirement. The fund puts together a portfolio for you. It rebalances constantly and becomes safer as you get older. This is a professionally managed fund at an extremely low cost.
- Example: Vanguard Target Date Fund
Risks to investments
- The biggest risk is inflation, which rusts away wealth
- As we’re building money for retirement, things are getting more expensive, so returns have to exceed inflation.
- The ups and downs of the market are normal.
- The market is chaotic in the short-term.
- Manage your emotions and avoid reactive investing.
- Avoid buying or selling based on what the market is doing.
- If you sell on bad news and buy on good news, the stock market is months ahead of you.
- The permanent trend line is that the economy eventually recovers and gets bigger.
- Focus on your actual investment time period and build up your money over a long period of time.
- The market is chaotic in the short-term.
The Animation Guild’s 401(k) program is managed by Vanguard. Learn more at the TAG’s 401(k) information page.
Bud Green can be contacted at bgreen@sageviewadvisory.com
This information is for reference only. Speak to a professional financial advisor or Vanguard representative before making any financial decisions.