The history of 401(k)s is a surprisingly short one — brief enough that there are undoubtedly people in today’s workforce who began contributing to a 401(k) when the option was first introduced.

401(k) plans grew out of the Revenue Act of 1978, which went into effect in 1980 and was designed as a way to provide a tax-free way for employees to defer compensation from bonuses and stock options. Employers soon saw the potential to create tax-advantaged retirement savings plans for employees as well. In 1981, the Internal Revenue Service began allowing employees to make such contributions toward their retirement, and 401(k)s became an increasingly common retirement option offered by employers. 

In 1996, the amount held in 401(k) plans in the United States reached $1 trillion. In this same year, 401(k) Day was established on the first Friday after Labor Day.

401(k) Day is an excellent time to educate yourself about your retirement options and your current plan. Here are some helpful steps you can take:

Reviewing your 401(k)

Life is busy, so it’s easy to lose sight of your 401(k)’s performance. 401(k) Day can help remind you that checking in on your 401(k) at least once a year is advisable, with more frequent reviews as you get closer to retirement. This process allows you to assess the account’s performance, identify any potential problems, and make changes as needed.

Your review should include:

Is your 401k on track with your retirement goals?

One of the favorite phrases at Grey Ledge Advisors is, “You have enough.” It’s always rewarding to tell a client that they’ve saved up enough money to retire.

You’ll need to carefully weigh a number of factors before you get to this point. Does your 401(k) have enough money to support your basic needs such as housing, health care, food, utilities, and transportation? Are you planning to make any lifestyle changes, like traveling more? Do you want to leave money to your heirs or charitable causes? Will your 401(k) savings be able to keep up with anticipated inflation?

Some common retirement savings goals include having 10 times your annual salary on hand at the time of your retirement, or having enough that you can meet your expenses by withdrawing only 4 percent of your retirement savings each year (which will make the account last 30 years). You can also use a retirement calculator to determine the savings you’ll need to comfortably retire.

Everyone’s circumstances are different, and 401(k) Day is a good reminder to set up a meeting with a financial advisor. These professionals can review your 401(k), offer personalized guidance, and determine what changes are necessary. 

Is it time for a change?

By reviewing your 401(k) at least once a year, you can update it to better reflect your current circumstances and your retirement goals. Rebalancing is a process where you reallocate your asset mix to adjust your risk tolerance and pursue higher-performing investments.

Some common reasons for rebalancing a portfolio include:

What if I don’t have a 401(k)?

You may not have a 401(k) if your employer doesn’t offer retirement benefits, if they offer a different type of retirement plan, or if you’re not eligible for your company’s 401(k) plan. Alternatively, you may have simply neglected to sign up for an employer’s plan, or opted out due to financial constraints. You may also lack a 401(k) if you’re self-employed.

401(k) Day is a good time to research the options available at your workplace and explore other retirement options, such as solo 401(k)s that can support a self-employed person and their spouse. Consult with a financial advisor to review your budget and set up a savings plan; even a small amount put toward retirement each paycheck can add up substantially over time. 

The professionals at Grey Ledge Advisors will offer the support necessary to get your 401(k) and retirement goals on track. Contact us today using our online form or by calling 203-453-9075.

The process of saving up for retirement, often done automatically through payroll deductions, is one that can easily retreat to the back of your mind. It’s important to take the time to periodically check your retirement savings plan to see if any adjustments are needed to better fit your circumstances and goals.

One of the simplest steps you can take: rolling over a 401(k) to an IRA, or individual retirement account.

In a 401(k), an employee makes pre-tax payroll deductions to an account sponsored by an employer, who may opt to match the employee’s contributions up to a certain point. If you leave your job for any reason, the employer’s contributions will stop and you will no longer be able to contribute to this account. 

An IRA is managed independently, allowing you to contribute some of your income toward this account, take more control over your investments, and have a retirement account that may  accept contributions, regardless of your employment status. The deductibility of an IRA contribution is phased out based on your income. 

If you maintain both a 401(k) and an IRA, however, you are limited in what you can personally contribute each year. Individuals under 50 who have both types of retirement accounts can contribute up to $23,000 to a 401(k) and $7,000 to an IRA; individuals ages 50 and older can contribute up to $30,500 to a 401(k) and $8,000 to an IRA.

Should you create a single retirement account by rolling over a 401(k) to an IRA? Here are some scenarios where this option might be a good idea:

You’re leaving a previous job

Depending on how much you have invested in your 401(k), your employer may not hold on to your retirement assets for you when you leave a job. For sums of less than $1,000, they can simply cash out the account and send you a check — with the sum being taxed at federal and state levels. If your 401(k) has between $1,000 and $7,000, you will need to move the money to the retirement savings plan offered by your new employer or into an IRA.

When a 401(k) account has a balance above $5000, you have the option of leaving the funds with your previous employer. The drawback of this approach is that you’ll no longer be able to make contributions to the 401(k), which limits your potential investment gains. You’ll also continue to pay fees on the 401(k) account, and your previous employer may increase these fees once you’re no longer with the company.

By moving your 401(k) balance to an IRA, you can resume contributions to the principal balance of your retirement savings. This, in turn, can potentially yield higher returns from your portfolio.  Many participants find that the variety of investment choices increases when they move the funds out of a company retirement plan.

For some 401(k) accounts, the rollover process can be more complex. For example, a 401(k) with a previous employer might have a substantial amount of the portfolio invested in the company’s stock, or you may only be partially vested in the plan and not yet able to receive the full employer match. A financial advisor can help you scrutinize these issues and plan the best path forward.

You want to consolidate retirement accounts

In today’s work environment, people are changing jobs more frequently as they search for career advancement opportunities, higher salaries, improved work-life balance, or a better corporate culture. This can lead to a person having several different 401(k)s with different plan types and asset allocations.

Rolling these 401(k)s into a single IRA offers a convenient way to manage all of your retirement assets. It eliminates the need to keep track of multiple different accounts, logins, investment options, and other information. Instead, you can manage one convenient portfolio that gives you a clear look at your retirement savings and helps you make informed decisions. 

Keeping your retirement funding in a single IRA isn’t putting all of your eggs in one basket, as you’ll be able to diversify your portfolio to manage risk. This approach also eliminates a certain risk factor that comes with leaving multiple 401(k) accounts behind with other employers. You might simply forget about an account, or have more difficulty accessing it if a former employer goes out of business or changes plan administrators.

You’re looking for more investment options

The investment choices in a 401(k) are chosen by the employer sponsoring the plan, and typically offer a more constricted range of investments. Most 401(k) plans have a limited range of investment choices, and you may only be able to select from a handful of mutual fund options. Most plans offer Target Date funds as an alternative for investors who are unsure of what to select as an investment option.

IRAs offer more diverse investment options, including mutual funds, exchange-traded funds (ETFs), certificates of deposit, annuities, and real estate investment trusts (REITs). This broader range of choices allows you to build a more diversified portfolio that better aligns with your risk tolerance and retirement goals. For example, younger workers with a longer time horizon may opt for stocks that can potentially offer higher returns, while those seeking to maximize their cost efficiency may opt for investments like ETFs and index funds.

You want to be more flexible with your retirement strategy

While the investment decisions in 401(k) portfolio are made through your employer, IRAs give you complete control over your portfolio. This allows you to quickly and easily make changes to your portfolio as needed.

For example, life events such as the birth of a child, purchase of a home, or increase in salary can all impact how much you can budget for your retirement, and may change your risk tolerance as well. Working with a financial advisor, you can update your IRA to make adjustments that take your new circumstances into consideration. 

IRAs can also offer better flexibility compared to 401(k)s in other areas as well. These portfolios generally have fewer restrictions when it comes to estate planning and choosing how funds will be distributed, and may offer more exceptions for penalty-free early withdrawals for purposes such as purchasing your first home or paying for higher education expenses. 

You’re dissatisfied with 401k provider

If you are keeping a 401(k) with a previous employer but unhappy about how it is performing or being managed, a rollover to an IRA offers a quick and easy way to update your retirement plan. You might choose this option if your 401(k) has anemic gains or frequent losses.

Be aware that active employees typically cannot roll over their 401(k)s to an IRA unless there is an in-service distribution clause allowing it. This clause may also specify a certain age, such as 59.5 or 62, when a rollover is permitted.

The team at Grey Ledge Advisors can discuss the process of rolling over a 401(k) to an IRA and whether this option is a good way for you to achieve your retirement goals. Contact us today by filling out our online form or calling 203-453-9075.

Every major life event comes with a transition period. It happens with children starting school, people getting hired for a new job, and couples getting married. In each of these cases, there’s the initial excitement over a new chapter in your life, the nervousness about what lies ahead, and eventually a comfortable routine.

Retirement is no different. Once you’ve reached that point in your life where you can comfortably leave the workforce and enjoy your newfound freedom, you’re likely to be excited early on, then grow more restless before becoming accustomed to your new situation. 

All retirees typically go through a few stages of retirement, whether it’s over a period of a decade or just a few years. Here’s a look at what you’re likely to experience in each stage, and how you might adjust your investment decisions along the way.

Pre-retirement

The pre-retirement stage occurs when you become more concerned about your post-career life than any advancement or change to the career itself. At this point, you’ll likely be satisfied to continue in your current role until it’s time to retire.

Retirement planning is essential during the pre-retirement stage, which typically extends about five to 10 years before your actual retirement. This is the time to see how your retirement portfolio is performing against your expected retirement needs; if you’re running a little short, you may need to use this time to catch up with additional contributions or possibly pursue a more aggressive growth strategy. If your savings are on track, you may want to shift to a more conservative strategy aimed at preserving the assets you’ve built up.

Assess your current debts and expenses as well as the income sources you’ll have in retirement, such as savings, pensions, retirement funds, investments, and home equity. You’ll also need to consider some major changes that come with retirement, such as changes to your health insurance that come when you move off an employer’s plan and the possibility of downsizing to a smaller home.

By meeting with a financial advisor, you can use this information to set your retirement goals and realistically plan for a lifestyle you’ll be able to afford. This planning should be an ongoing, flexible process that extends into your retirement, helping to ensure that you don’t outlive your assets and that you have enough to leave something behind for your loved ones or a meaningful charitable cause.

Honeymoon

As the name suggests, the honeymoon stage is marked by excitement and optimism over your long-awaited retirement. You’re now free to spend your time however you’d like! 

This is also a time when retirees tend to splurge a bit, dipping into their savings to take a long-awaited dream vacation. Although it’s a major expenditure, it will also take up a smaller share of your overall savings and won’t have as substantial an impact on its growth potential as it would if you tapped into it later in life.

This stage is a good time to track your income and expenses, monitor your investments, and see how well your assets are supporting you. Your financial advisor can discuss any concerns you may have, and recommend strategies to meet upcoming expenses such as the potential for higher health care costs.

Disenchantment

The honeymoon period is usually rather brief. After awhile, retirees start to feel bored or frustrated with the succession of wide open days, and may feel like they’ve lost their sense of purpose. 

This stage may also be accompanied by growing concerns about your finances and whether you’ll be able to meet your needs as your retirement extends for several more years. This can also be a confusing time to set a budget due to factors such as required minimum distributions from retirement accounts, Social Security eligibility, and unpredictable health care costs.

This is an especially important time to take long-term care expenses into account and meet with your financial advisor on how you can continue to prepare for them. You should also review and update any documents related to the transfer of your assets in the event of your death or incapacitation, including your power of attorney, will, and estate plan.

Reorientation

During the reorientation stage, you’ve had time to experience retirement and can now consider what adjustments you’d like to make. Reorientation is all about finding a new purpose and pursuing new passions now that you’ve decoupled from work. You may find yourself volunteering more, taking on new hobbies, or creating a bucket list of travel destinations.

Some retirees decide during this phase that they’d like to return to the workforce, although this is usually in a seasonal or part-time capacity. Doing so can help give more structure to your days while also bringing in some extra income.

If you’re earning extra money through a job, your financial advisor can discuss options for investing this money. They can also update your retirement plan to adjust for any financial changes that your reorientation may create.

Routine

In this final stage, you’ve established an identity and daily routine you’re satisfied with. This is similar to the routines that come with earlier adjustments in life, but you’ll have more self-direction in your decisions.

Your finances should also be routine, in that your income should be enough to meet your expenses. Your financial advisor can help you monitor your assets to make sure this is the case, and can also help you make any adjustments necessary.