401(k)

Don’t Let Outdated Money Advice Endanger Your Money

We’ve all received unsolicited financial advice, often from well-meaning relatives and friends. In many cases, this advice is useful. But a lot of “classic” personal finance advice simply hasn’t aged well, and is now viewed as flawed. It’s just not applicable anymore in today’s world.

Before you blindly accept any money advice you receive, be sure to do some additional research to find out if the advice is outdated. Here are nine examples of financial tips that may no longer apply.

“Find a good employer and stay forever”

Many of us know an older relative that began working at a company as a teenager and then retired from that same firm four decades later. Often, they walked away with a sizable pension and even health benefits for life. (See also: If You’re Lucky Enough to Receive a Pension, Here Are 6 Things You Need to Do)

This doesn’t happen much anymore. Job security is not what it once was. A decline in labor unions means that guaranteed annual pay increases are a thing of the past. And a pension? Forget it.

There’s a lot of evidence now that switching jobs periodically will result in higher pay increases. And with the introduction of 401(k) plans, retirement savings are portable when your employer changes.

“Pay off all of your debt as soon as you can”

This is not so much “bad” advice, it’s just less than ideal. Yes, it’s a fine goal to remain as close to debt-free as possible, but in the current environment, carrying some kinds of low-interest debt may be more beneficial for you in the long run.

Let’s say you have a 30-year fixed-rate mortgage and were fortunate enough to lock in a low 3.5 percent interest rate. Let’s also say stock market returns are averaging 7 percent per year. Over time, you’re going to be better off using any extra money you have to invest in stocks rather than pay off your loan early. Generally speaking, if your investment returns outpace current interest rates, there’s not much incentive to pay off debt early.

“Technology is a fad”

There was a time when some of the most savvy investors dismissed many tech stocks because they didn’t understand them. The bubble collapse of advertising-dependent dot-com companies in the late 1990s didn’t help the image of this sector. But there’s no denying the fact that investing in technology companies with solid business models has been a clear path to wealth in recent years.

All you need to do is look at the incredible returns for companies like Amazon, Apple, Netflix, Facebook, and others. A full 15 percent of companies in the S&P 500 are technology companies, and they comprise most of the companies traded on the NASDAQ.

Tech stocks are still notoriously volatile, but if you ignore the sector completely, you’re ignoring some…

What You Need to Know About the Easiest Way to Save for Retirement

If you have a 401(k), chances are you’ve been given the option to invest in a “target-date” fund. This is a balanced mutual fund that gradually changes its investment mix depending on how close you are to retirement. It’s designed to hold a higher percentage of riskier, growth-oriented investments like stocks when you’re young, and increase the proportion of more conservative investments, such as cash and bonds, as you age.

Many brokerage firms offer target-date funds, which come with names like Fidelity Freedom 2050 or Lifepath Index 2045. The idea is to pick one associated with the year you expect to retire.

There are advantages to these funds, especially for those who don’t want to spend a lot of time managing their investments. But there are some drawbacks, too.

Pros

Let’s start with the upsides.

1. They automatically rebalance

Target-date funds are designed to build wealth while you’re working, and protect it as you approach retirement. They accomplish this by gradually and automatically changing the investment mix over time, which is referred to as rebalancing. Because it’s not particularly easy for the average investor to make these kinds of changes on their own, a target-date fund offers the convenience of “set it and forget it,” saving you time and extra work.

2. They are easy to select

Picking which mutual fund is right for you is tricky, because there are often so many choices. There are funds for specific industries, funds for growth, and others for income — it can be overwhelming. When choosing which target-date fund is right for you, though, all you need to do is pick one that lines up best with the year you expect to retire. So if you are now 30 years old and plan to retire at age 63, you would pick a fund labeled with the year 2050.

3. They offer diversification

Most target-date funds are essentially “funds of funds.” In other words, they are comprised of a mix of mutual funds, which are…

7 Traps to Avoid With Your 401(k)

More and more Americans are choosing an employer-sponsored 401(k) as their preferred way to build up their nest eggs. As of 2014, an estimated 52 million Americans were participating in a 401(k)-type plan.

When used properly, a 401(k) can be a powerful tool to save for your retirement years, but there are a couple of crucial pitfalls that you have to watch out for. From high fees to limited investing choices, here is a list of potential downsides to 401(k) plans — and how to work around them.

1. Waiting to set up your 401(k)

Depending on the applicable rules from your employer-sponsored 401(k), you may be eligible to enroll in the plan within one to 12 months from your start date. If your eligibility kicks in around December, you may think that it’s fine to wait until the next year to set up your retirement account.

This is a big mistake for two main reasons.

First, contributing to your 401(k) with pretax dollars allows you to effectively reduce your taxable income for the current year. In 2017, you can contribute up to $18,000 ($24,000 if age 50 or over) to your 401(k), so you can considerably reduce your tax liability. For example, if you were to contribute $3,000 between your last two paychecks in December, you would reduce your taxable income by $3,000. Waiting until next year to start your 401(k) contribution would mean missing out on a lower taxable income!

Second, your employer can still contribute to your 401(k) next year and make that contribution count for the current year, as long as your plan was set up by December 31 of the current year. Your employer contributions have to be in before Tax Day or the date that you file your federal taxes, whichever is earlier.

How to work around it

If you meet the requirements to participate in your employer-sponsored 401(k) toward the end of the year, make sure to set up your account by December 31st. That way, you’ll be ready to reduce your taxable income for the current year through your own contributions and those from your employer before their applicable deadline (December 31 and Tax Day or date of tax filing (whichever is earlier), respectively).

2. Forgetting to update contributions

When you set up your 401(k), you have to choose a percentage that will be deducted from every paycheck and put into your plan. It’s not uncommon that plan holders set that contribution percentage and forget it. As your life situation changes, such as when you get a major salary boost, marry, or have your first child, you’ll find that your contributions may be too big or too small. (See also: 5 Times It’s Okay to Delay Retirement Savings)

How to work around it

To keep a contribution level that is appropriate to your unique financial situation, revisit your percentage contribution every year and whenever you have a major life change. Don’t forget to also check whether or not you elected an annual increase option — a percentage by which your contribution is increased automatically each year — and adjust it as necessary.

3. Missing out on maximum employer match

Talking about contributions, don’t forget that your employer may contribute to your plan as well. In a survey of 360 employers, 42 percent of respondents matched employee contributions dollar-for-dollar, and 56 percent of them only required employees to contribute at least 6 percent from paychecks…

8 Money Moves to Make Before You Remarry

Every year, about three per 1,000 Americans divorce from their spouse. Since about seven per 1,000 Americans marry every year, there is a chance that some divorcees will eventually tie the knot again with a new partner.

But before you remarry, you should evaluate your finances. Let’s review eight money moves that will set you both up for financial safety and success.

1. Make Amendments to Your Will (or Make One!)

The joy of finding love again can make you look at everything through a rosy filter. While no one likes thinking about their mortality, especially close to a big wedding day, the reality is that not updating your will could leave your new partner (and potential dependents) with a messy court battle for your estate. Review your current will and update it as necessary. For example, you may redistribute your estate to include your new dependents and choose a different executor — a person who will manage your estate and carry out the orders in your will.

If you don’t have a will, then setting one up should become the top priority of all money moves before you remarry. In the absence of a will, a judge will appoint an administrator who will execute your estate according to your state’s probate laws. What is legal may not be the ideal situation for your loved ones, so plan ahead. (See also: What You Need to Know About Writing a Will)

2. Update Beneficiaries Listed on Your Retirement Accounts

Even after setting up or updating your will, you still need to update the list of beneficiaries listed for your retirement accounts. This is particularly important for 401K plan holders. The Employee Retirement Security Act (ERISA) stipulates that a defined contribution plan, such as a 401K, must provide a death benefit to the spouse of the plan holder.

Your beneficiary form is so important that it can supersede your will under many circumstances. When updating your beneficiary form before you remarry, there are three best practices to follow:

  • Get written consent from your previous spouse, if applicable, to make changes;
  • Second, designate only children who are of legal age so they can actually carry out their wishes;
  • Third, find out the tax implications for beneficiaries other than your spouse as a large windfall could unintentionally create a financial burden.

3. Consider Setting Up a Trust

Since we’re talking about potential financial burdens, many of them could come out of an estate with lots of valuable assets being divided among many beneficiaries, many of them very young.

When you have accumulated a lot of wealth over the years, you could be better served by a trust than by a will for several reasons, including keeping your estate out of a court-supervised probate, maintaining the privacy of your records, and allowing you to customize estate distribution. While the cost of setting up a trust can be up to three times that of…