Tips from Donna Gordon (November Wesban Monthly)
by Donna Gordon on January 16th, 2015

How Saving Too Much in Your 401(k) Could Cost You   

The idea of contributing too much to a company retirement plan may sound strange, but it can happen, especially if an employee contributes high amounts in a short time frame, thereby hitting the annual contribution limit too early and missing out on part of the employer's 401(k) match, rather than spreading contributions out during the year.
For 2014 the annual 401(k) contribution limit for workers under age 50 is $17,500, and for those age 50 and older it's $23,000. (Matching contributions from the employer don't count toward these caps.) Let's say a 40-year-old worker who makes $100,000 a year contributes 25% of her pay to a 401(k) plan every two weeks starting in January, and that the company matches the first 3% dollar-for-dollar. By contributing at such a high rate, the worker would reach the $17,500 cap on annual contributions sometime in September and wouldn't be able to make any more contributions after that.
Up to that point the worker would have had $2,192 added to her 401(k) through her employer match. But by contributing at a lower rate each pay period (17.5% of pay, to be exact) and spreading her contributions out more evenly throughout the full calendar year, the worker would receive a full year's worth of the employer match: $3,000. By contributing too much too soon, the worker has cost herself more than $800 in eligible retirement money from her employer.
It's well worth planning ahead so as not to miss out on matches later in the year. Saving a lot in your 401(k) is a good thing, but when you save it may be nearly as important.
401(k) plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty.
 
Retirement Distribution Pitfalls: Not Accounting for Market Fluctuations  

 Accumulation is a key facet of reaching your retirement goals. However, we tend to see far less about portfolio drawdown, or decumulation—the logistics of managing a portfolio from which you're simultaneously extracting living expenses during retirement. This can be even more complicated than accumulating assets.
Pitfall: One of the big mistakes of retirement distribution can be not adjusting withdrawals to account for market fluctuations. So-called sequencing risk—the chance that retirees may encounter a harsh bear market early in the life of their withdrawal program—can have a big effect on a portfolio's longevity. Taking fixed distributions from a shrinking pool means that a retirement portfolio could suffer losses from which it would be impossible to recover.
Workaround: Maintaining a well-diversified asset mix may be a retiree's best weapon for protecting his or her portfolio from a bear market. For example, holding assets in high-quality bonds and cash may allow a retiree to meet desired living expenses without having to withdraw from equity holdings during periods of market weakness. That said, the smartest retirement-distribution plans also make adjustments during times of market duress, possibly reducing withdrawals or, at a minimum, forgoing upward inflation adjustments.
All investments involve risk, including the loss of principal. There can be no assurance that any financial strategy will be successful. Asset allocation and diversification are methods used to help managed risk. They do not ensure a profit or protect against a loss. This is for informational purposes only and should not be considered tax or financial planning advice. Please consult a tax and/or financial professional for advice specific to your individual circumstances.
 
Target-Date Pros and Cons  

 Whether a target-date fund is the best choice for an investor depends on a few different factors, including the degree to which the investor wants to manage his or her own retirement portfolio. Below are some pros and cons of using target-date funds.
Pros
One-stop shopping: For an easy-to-use, all-in-one retirement savings vehicle, a good target-date fund is tough to beat. It allows investors to focus on one of the most important pieces of the retirement savings puzzle—how much to save—rather than getting bogged down in making investment decisions.
Professionally managed allocations: Fund shops typically put a great deal of thought into the design of their target-date series. That doesn't mean target-date funds are perfect, though, or suitable for all investors. Some used allocations that were overly aggressive when the 2008 market crash hit, resulting in heavy losses for their investors, including those who were close to retirement.
Automated adjustments: Target-date funds adjust their allocations automatically as the investor's retirement date approaches. No other commercially available investment product is designed to do this.
Reasonable fees: Target-date fund fees are generally in line with those of other mutual funds. Also, target-date funds built around index funds tend to be cheaper than those built around actively managed funds.
Cons
Lack of control: For investors who want more control over their investment or allocation choices, target-date funds might not be the best option. By choosing one, an investor is essentially limited to a given fund family's funds and allocation framework. Some investors may not welcome these constraints.
Added complexity if used with other holdings: As an all-in-one vehicle, target-date funds are built to serve as the only retirement holding you need. However, if you'd rather not put all your retirement savings into a target-date fund and/or wish to add satellite holdings, this will mean recalculating the asset allocation of the entire portfolio yourself to make sure it's in line with your needs.
In-retirement shortcomings: Target-date funds may become inadequate once the account holder reaches retirement. For example, those hoping to use assets invested in a target-date fund to generate income to cover living expenses in retirement may be disappointed. In fact, many retirement series put target-date investors into conservatively invested retirement income funds once the retirement date is reached.
Despite these potential drawbacks, for many investors a target-date fund may be a great choice to save for retirement provided it comes from a quality fund shop and operates using quality parts—that is, quality underlying funds.
The target date is the approximate date when investors plan to start withdrawing their money. An investment in a target-date fund is not guaranteed, and you may experience losses, including losses near, at, or after the target date. The principal value of the fund(s) is not guaranteed at any time, including at the target date. There is no guarantee that the fund will provide adequate income at and through retirement. Consider the investment objectives, risks, charges, and expenses of the fund carefully before investing. Target-date funds are sold by prospectus, which can be obtained from your financial professional or the company and which contains complete information, including investment objectives, risks, charges and expenses. Investors should read the prospectus and consider this information carefully before investing or sending money. Some target date funds have objectives or investment strategies that change over time—please read the prospectus of the fund you are considering carefully for further information.



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