TOP 3 Retirement QUESTIONS Answered
Why and How TO DO an IN SERVICE 401(k) Rollover?
When Should I Retire?.
When Should I start taking my Social Security?

Why and How TO DO an IN SERVICE 401(k) Rollover?

Unfortunately the public in general has been tricked into believing that a 401k was some how a better option than the old “Defined Benefit Pensions” that based benefits off years of service and pay scale. For most a 401(k) will only be a piece of the retirement pie. One of the growing concerns I have found is that the majority of people I have spoken with have no idea what options they have with a 401(k) when it comes to a rollover before retirement. Many plans now offer an In Service Rollover Option which allows the employee a way to move some up to all of there 401(k) money into an IRA without any taxes or penalties, assuming it is a Qualified IRA set up prior to the rollover. Most of the 401(k)’s will also still allow the employee to keep his/her existing 401(k) open for new contributions after rolling some or all of its balance out.

Why would this be a good idea?

  • For starters, 401(k)’s inherently have high fee’s associated with them. Many will range from 1.50% up to 2.5%. Now if you are an aggressive investor this may not be much of a concern, but if not and you are shooting for say a moderate return of 5%-7% then you may lose up to half of your returns to fees and still have risk of your principle to only end up with 2.5% assuming the market goes up. To me, THAT MAKES NO SENSE.
  • Also, many 401(k)’s will not allow employees to get to their money in times of financial need or will only allow access for certain financial concerns. It’s your money and you should get to decide when and how to use it.
  • Considering how many options the consumer has to place there money outside of a 401k in an IRA, you would have to agree that a standard 401(k) offers VERY limited options in comparison.
  • Once you have received your employer Match, if you have one. That is the entire match that money receives. It’s only on new dollars coming in. Of course, you would only rollover VESTED dollars which in many plans is everything once you have attained age 59 ½.
  • Many IRAs will offer guaranteed returns on your money with safety of principle that could be higher than the moderate options in a 401(k).

How to do an In Service 401(k) Rollover!

While a 401(k) may not solve all your financial needs at retirement, one thing is for sure, most can not afford it to fail just before retiring. If you feel you are not a high risk taker then an in-service IRA rollover may be a solution for you. There are numerous investment strategies that will help you to diversify your 401(k) which may result in less volatility and higher growth.

If permitted by your company-sponsored retirement plan, in service withdrawals can give you early access to your retirement assets. With an in service, non-hardship withdrawal, you may be able to request a distribution from your retirement account while you are still employed. However, not all company-sponsored retirement plans offer these withdrawals.

We are here to help you take the first step in finding out if you are a good candidate for an In-Service Withdrawal / Rollover. It is important to understand that if you take the money from your 401k instead of Rolling it over then the withdrawal will typically be treated as ordinary income and could cause a tax liability. Also if you are under age 59 ½ you could be subject to a 10% early withdrawal penalty. However, by rolling the money over to a qualified IRA then you continue to benefit from the tax-deferred growth with out any immediate tax liability or penalty.

These ideas may also apply to your 403(b), or 457 Rollover.

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When should I retire?

Well this does seem to be the big question. There have been numerous articles written on this. The New Gallup data out shows that American’s on average think of 61 as a target retirement age, up from 59 about a decade ago and 57 back in 1991. The U.S. Census puts the actual retirement figure at about 64 for men and 62 for women. For Social Security the earliest retirement age is 62 to collect benefits. So, what does all this mean? Well the truth is it takes a lot of individual thought and review to decide what age is the right age for you to retire.

  • How much money do I have?
  • What rate of return can I get?
  • How long does my money last?
  • How much will my taxes be?
  • Can I reduce my taxes at retirement?
  • How good is my health?
  • How long does most of my family live?

These are just some of the questions to consider when deciding your retirement age and retirement future. Personally I usually approach retirement with my clients on a very simple path. We start by looking at all assets available. Then we look at all expenses and try and project what changes to those expenses may be coming. We then figure out what rate of return their assets need to earn in order to stay retired to a specific age we agree upon. If the assets have to earn a high rate of return to stay retired we start looking for ways to reduce expenses and we get smart about redirecting the income to come in more tax favorable or even non taxable. Many people really overlook this part. Think About it, if you can save $4,500 in taxes. It is the same as making 4.5% on $100,000 with no risk. Even if you are expected to only get a small refund in retirement, you can increase that refund by a significant amount based on your investment choices thereby still generating that desired tax savings.

If you can stay retired with low risk assets, I suggest doing exactly that. Many times we can still do a tax saving strategy along side of a low risk portfolio. We can achieve reasonably high returns using guaranteed principle safe options that as long as income is our main desire, some choices will give us up to 6-7% returns for income in the future. This is also why we suggest starting to look a few to several years before retirement to get our strategy in place. Today, my most common retiree is the average worker who has a 401k, Social Security, maybe a small other pension and still has a mortgage on their home. While this is a challenge, it is also my favorite scenario to tackle as I love to see how people’s views on their future change when we start coming up with strategies and ideas to combat needs for retirement. While no scenario is the same, the earlier you start to tackle this, the more options you will have.

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Why should I start taking my Social Security?

Well let’s break this down, while we all know that you can start claiming your Social Security benefits at the ripe old age of 62, the real question is, why wouldn’t I?

For some this may be a requirement due to poor health or being forced into early retirement by some other reason. For others it may be that you have been paying all your life and just don’t want to wait any longer. But, before you take that first draw, there may be a few things to consider.

First take a look and see your projected income.

For most Baby Boomers your full retirement age won’t occur until age 66 and if you were born after 1960 then it will age 67. By deferring to take income till your full retirement age you could see around a 25% increase from what they would have been if you started drawing at age 62. If you continue to defer taking payments till age 70 your benefits will continue to increase by 8% for each year you wait till age 70.

What does that all mean?

If someone files and begins receiving benefits at age 62 with an $80,000 average income and they lived till age 96 they would receive approximately $694,416.

If someone files and begins receiving benefits at age 70 with an 80,000 average income and they lived till age 96 they would receive approximately $910,000.

Now, obviously, if you died at age 70 then starting distributions at age 62 would have been a better deal for you. But still, deferring does make a big difference much of the time.

Sometimes we can co-ordinate our benefits. I find that if we are dealing with a married couple’s retirement. You can start drawing on one spouse and leave the other untouched. We many times will suggest that the highest income earner wait as this will lock in a higher benefit which will also mean a higher spousal benefit at death. This may be the key to keeping the lower income earner spouse retired.

These are all important things to consider, let’s face it, everyone’s situation is unique and this is why you may need individual planning for your best options to be realized.

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