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Is your 401(k) the best place for you to save for retirement?

Written by: Sean Hyman

Article Overview: There have been a lot of news reports recently about 401(k) plans becoming more transparent. This is excellent news, but it may not be the only answer that people need.

Is your 401(k) the best place for you to save for retirement?

There have been a lot of news reports recently about 401(k) plans becoming more transparent.

The government is discussing a new bill "401(k) Fair Disclosure for Retirement Security Act of 2009" in which the funds offered have to disclose their fees and expenses in a plain-English way to their participants. This is excellent news, but this may not be the only answer people need. People need financial education.

If you invested $500/mo in your 401(k) and made a 10% annualized return over 30 years, you would end up with $1.1 million dollars. Sounds great!

But look at the expense ratio of the funds in your 401(k) - some can be as high as 2% per year! That means your $1.1 million dollars is now worth $745,000 (assuming an annualized return of 8%). The fund company took $350,000 of your money!!

How do you make the most of your 401(k) and invest wisely? How can you stop giving your money away to the fund companies?

A strategy that is frequently used by financial advisors is the "401(k) match / Roth IRA" strategy.

1. Contribute to your 401(k) and maximize your company match on contributions.

2. Fully fund your Roth IRA.

3. Return to your 401(k) and invest.

Companies mainly do contributions in 2 different ways (however there may be some other variations in your company plan): Contributions on base salary or a match on your contributions. For example:

• If your company contributes 3% of your base salary, don't contribute anything yet. Skip to step 2 immediately.
• If your company matches the first 3% of your contribution, then only put in 3% to get the full match. You've just made a 100% return. FREE MONEY!

Now you should continue your retirement savings using a Roth IRA. This savings vehicle is an amazing tool. It lets you pay taxes on your contribution now, lets it grow tax FREE and you can withdraw the money and use it in your retirement (as well as other situations) TAX FREE. You do not pay taxes on the growth at all!

Assuming our example above, if you put $500/mo into a Roth IRA over 30 years, you will have paid taxes on $180,000. However, after those 30 years, you should have around to $1,000,000 to use TAX FREE!

Now step 3. A rule of thumb for retirement savings is to try and save 15% of your income. Assuming you have not reached this guideline by steps 1 and 2, it's time to return to your 401(k).

Pick an in-expensive fund (based on the expense ratio and your overall asset allocation) and invest your money there. Do look at the performance of the fund as well, as some cheaper funds are also poor performers, and some expensive funds have outperformed the market for years. Use your judgment as an educated investor we are teaching you to be!

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Article Tags: 1 million dollars, annualized return, base salary, different ways, disclosure, expense ratio, financial advisors, financial education, free money, li li, match, nbsp, news reports, plan contributions, retirement savings, retirement security act, roth ira, step 2, ul class, variations



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You can do this without financing your business with it - If you are leaving your present employment or have retirement funds from a previous employer, you can rollover those retirement funds without any penalites or taxes involved (into your own business) rather than leaving them in someone elses business. You do not have to finance your business with your retirement to do this. Here's how it works: Our resources form a C corporation for your new business, your C-corporation creates a new retirement plan. Funds from the existing retirement plan are rolled into your corporations new reitrement plan and your new retirement plan purchases stock of your corporation. The program is IRS approved! Contact me if you are interested. FYI- This program has also been helpful for people obtaining an SBA loan for their franchise or Acquisition, because they can obtain the loan down payment for the loan from the rolled retirement funds (without penalties or taxes) rather than financing the entire business themselves. Contact us!
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