What if my 401k is underperforming?

Your employer provided 401k plan can be an extremely effective way to fund your retirement. It allows you the opportunity to contribute pre-tax dollars to retirement accounts through a salary reduction agreement and immediate gains are realized when your employer matches your contributions. Your contributions are also made through easy and regular payroll deductions and you can defer federal and in most cases, state taxes.

Investment decisions are simplified; normally your employer has selected 6- 12 investment choices set-up by the plan administratorthis is where shortcomings often show-up! All too often the investment choices offer very poor returns. Consider this

1. Approximately 25% of workers don't even participate in their 401(k) plan.
2. Only 10% of workers contribute the maximum amount permitted.
3. Almost half of those who do participate don't contribute enough to receive the full match from their employer.
4. Participants make a variety of mistakes when investing their 401(k) funds, including investing too conservatively, not rebalancing on a periodic basis, and investing too much in their company's stock.
5. Almost half of those changing jobs cash out their 401(k) account rather than rolling it over to another 401(k) plan or an individual retirement account.

Most people are not aware that many plans allow the employee to make a one time transfer to a separate investment at any time. Simply statedyou can transfer the funds from your 401k into another investment such as an IRA. When you do this you do not lose any benefit of your employer match. And in doing so, especially with the way the market has been performing, you can realize a far greater return than you were experiencing in your 401k.

What should I do with the 401k from my previous job??

Resist the urge to take the cash! It can be tempting, but you may be hit with a 10% IRS penalty if you are under age 59. You will also end up paying ordinary federal and state income tax on the value of the distribution. So if there is $20,000 in the 401(k) plan and you cash it in, you could end up with only $11,000 (assuming 10% early withdrawal penalty and 35% combined state and federal income taxes). Not exactly the most investment savvy decision!

You could roll it into your new employers plan. This is very simple, but then you would be subject to the limited investment options of your new employers 401(k) program. However, if you like the investment choices in the new 401(k) program, this is will work out fine. (In most cases you can only do this if you had another job offer before leaving your current employer).

Completing a 401k rollover is almost always the best choice for those interested in providing for a sound retirement because it allows the your capital to continue compounding tax-deferred while providing maximum control over the funds.

You can open up an IRA (Individual Retirement Account) at nearly any investment company. You pick the investment company that offers you the type of investments that are best for you. Your old employer will send you a check for the balance of the 401(k) program, but the check will not be made payable to you. It will be made payable to the investment company that you choose. As long as this rollover is executed as a trustee-to-trustee transfer you will not have to pay any taxes. The only fees you would pay would be whatever fees (if any) your old and/or new investment company may charge you.

What's the difference between life insurance and annuities?

An annuity is a fund that provides tax-deferred growth throughout its accumulation phase. During this time you are paying into the fund to help it grow until your retirement. Upon your retirement, unless you choose an earlier time, the fund will transfer to the payout phase. At this time the insurance company pays an income stream over a specified time period, for a specified amount or for life. The primary purposes of an annuity are to defer income taxes until a future date and to provide an income stream. Annuities are long-term financial products and generally designed for persons who don't need access to the money for several years or at least until age 59.

Life insurance pays out a little differentlywhen youre gone. You, the insured, pay a premium to the insurance company who in turn promises to pay a certain amount to your beneficiaries when you pass away.

Many people think of annuities and life insurance as basically the same thing. However, as you can see they are very different tools. The main difference is that an annuity is considered a retirement tool whereas life insurance provides a benefit to your heirs. Said another way, you establish an annuity to fund your retirement and you establish life insurance to provide for your beneficiaries when youre gone.

Is an annuity safe?

Your tax-deferred annuity is one of the safest investments available. Insurance companies issue annuities. Most people are quite surprised to learn that the insurance industry is much, much larger than the banking industry. Insurance companies have the size and financial strength and security to guarantee fixed rates of return.

When you enter into an annuity a qualified legal reserve life insurance company is required to meet its contractual obligations to you. The reserves of the company must, at all times, be equal to the withdrawal value of your annuity policy. In addition to reserves, state law also requires certain levels of capital and surplus to further increase your protection.

Legal reserve refers to the strict financial requirements that must be met by an insurance company to protect the money paid in by all policyholders. These reserves must be at all times, equal to the withdrawal value of every annuity policy. In addition, state insurance laws also require that a life insurance company must maintain certain minimum levels of capital and surplus, which provide additional policyholder protection.

Tip: You can see the financial stability rankings of insurance companies through Standard & Poors or A.M. Best.

How much should I invest in an annuity?

Annuities are actually much more flexible than many people believe. Most offer multiple ways to invest, whether in a lump sum or through periodic contributions. They also offer a wide range of distribution options, including the unique ability to generate an income that you can never outlive.

Whether youre considering a deferred or immediate annuity, the amount of money you should consider putting into an annuity depends on:

1. Your immediate actual and potential financial needs
2. Your long-term financial goals
3. Your current savings/investment portfolio
4. The range of alternatives available to you

Of these, the most important is your immediate actual and potential financial needs. If youre buying a deferred annuity and you have a sudden need for cash, you can usually withdraw a small amount without penalty.

You will however, likely pay a penalty if you make a large withdrawal within a few years after youve bought the annuity. If youre buying an immediate annuity, you usually cant get any more than the regular payments, no matter how badly you need cash. That said, if you have other sources of cash that are sufficient for any emergency or unforeseen needs, then the immediate needs criterion is satisfied and the other criteria become more important.

Which IRA is right for me?

There are some important differences between a Traditional IRA and a Roth IRA. You definitely should consult with a financial specialist in deciding which is right for you, but here are a few of the basics

In most all situations the Roth IRA is better because you've already paid the taxes on the money before it gets invested so you dont pay taxes on the interest earned. Also, with a traditional IRA, you must start taking money out when you reach age 70. This is not the case with a Roth, so if you don't need the money, you can leave it in the account and let it continue to grow. You can take the contributions you've made to your Roth IRA early without paying an early distribution penalty or taxes to the IRS as long as you meet certain requirements. Be sure to consult with your financial advisor about this.

Most traditional IRAs provide you with an income tax deduction based on certain eligibility requirements. The Roth IRA does not provide you with any income tax deduction. As long as certain requirements are met, there is no tax obligation on earnings when money is withdrawn from a Roth IRA account.

The quickest way to figure out whether a Roth IRA makes sense for you and your situation is to have a financial advisor present a hypothetical illustration for you. Most advisors will run these illustrations for you free of charge, and it only takes a few minutes to do the calculation.

How do I use the right mutual fund?

It can definitely get overwhelming thinking about retirement and the seemingly vast amount of money that youll need to provide for a comfortable retirement. The key is compounding with time. Essentially, compounding is the idea that one can make money on the money one has already earned. That's why, the earlier you start saving, the more time your money gets to grow.

Mutual funds give you a safe investment that can build capital for retirement years. As we discussed earlier it is also a good means of allocating assets and maintaining an appropriate amount of risk. Diversification is important in any sound financial strategy and mutual funds help you with this.

As with any investment you need to do your homework. Dont just rely solely on what an advisor tells you. Consider the following when choosing funds

1. What is the funds goal?
2. What is the funds investment strategy?
3. What are the main risks?
4. What are the fees and expenses?
5. Who manages the funds?
6. How do I buy and sell shares?
7. What other services are available from the fund?

Its our opinion that you should invest in tax-sheltered retirement plans first. Once youve done that a mutual fund can be a sound investment tool to help you get that much closer.