NOT SURE WHAT TO DO WITH YOUR 401K WHEN RETIRING? SOME OPTIONS

Congratulations on accumulating a YUGEEE portion of your retirement money in a 401-K! As you approach retirement you need to decide what to do with YOUR HARD EARNED MONEY, currently sitting in one or more 401K Plans. This is a nice problem to have! 

SOME OPTIONS FOR AFTER RETIREMENT

  • Keep your money in your 401-K Plan(s).
  • Roll into an IRA or a ROTH IRA and convert to Exchange Traded Funds (ETFs), to lower fees.
  • There are many more complex options I am not going to discuss today, such as: Gold, Real Estate, Dividend Paying Stocks, Stock Portfolio, Stocks and Bonds, etc.

DIVERSIFICATION – THE ADVANTAGE OF/401K PLANS

401K Plans typically offer Stock and Bond Mutual Funds, and Cash Savings Accounts.  Majority of investors select high fee, Mutual Funds for the advantage of diversification. Mutual funds hold a large number of stocks or bonds, and when one or more stocks decline significantly, (example last week Netflix dropped about 12%) the fund may be able to counter the losses with the remaining batch of stocks/bonds. Therefore, losses are minimized. 

RISK EXAMPLE – LACK OF DIVERSIFICATION 

Over the years your dollar cost averaging investing grew your Netflix holdings to $200,000+ in stock. CONGRATULATIONS! However, last week you lost ~12%/$24,000, when Netflix released quarterly earnings and disappointed the analysts. 

If you Netflix stock went down by 12% how much does it have to recover to regain 24,000?    14% = $24,000/$176,000.   That is only two percent more than you lost – not that bad. But the higher your loss percentage, the harder you will have to work to make it back! What if Netflix had gone down by 50% and you lost $100,000?    You need to DOUBLE your money to recover the lost $100,000. WOW!!  How long will it take to double your money? This is why we all need some form of diversification.

401-K/MUTUAL FUNDS CONS – VERY HIGH FEES

Mutual funds tend to charge horrendous high fees that most of us NEVER notice. Have you ever seen your 401K Plan State – “Your 2018 return was 7% BUT we charged you 3% in fees, so your REAL return was 4%?”  Do not worry if you have not seen this note in the Font 3 footnotes.  I have not either!  It is not required by regulations.  

Have you noticed every U. S. entity has one or more lobbying groups with exception of one – The American Citizens!

LET’S LOOK AT THREE LARGE INVESTMENT FIRMS THAT SELL MUTUAL FUNDS, PROFITS; AND THE CEO’S ANNUAL COMPENSATION

  • Morgan Stanley$40 BILLION Profit {CEO Compensation – $29 MILLION}
  • Fidelity Investments$6.3 BILLION Profit {Unable to find the CEO’s Compensation, however she has a net-worth of $11.2 BILLION}
  • Charles Swab – $3.5 BILLION Profit {CEO Compensation- $20 MILLION)

These firms and many others made their BILLIONS of DOLLARS PROFIT off their customers.  That’s right, just look in the mirror if you have any mutual funds.  We are making the senior leaders worth hundreds of millions of dollars!

THE CONSEQUENCE OF HIGH 401K FEES

If you invested $5,000 per year for 45 years and averaged seven percent annual growth rate, the impact of those “small” fees can be massive.   I calculated the impact of paying, 2.5% 1.5% 0.5% and 0.03%, below.   

GUARANTEE: As the fees go down, you will get happier and happier.

2.5% FEES: Maturity Value: $730,809.11

  • Monthly Deposit: $417
  • Period: 540 Months
  • Annual Interest Rate: 7.0%
  • Annual Fees: 2.5%
  • Effective Annual Interest rate: 4.5%
  • Compound Method: Monthly
  • Total Principal: $225,180.00
  • Interest Earned: $505,629.12
  • Maturity Value: $730,809.11

WITH 1.5% FEES: Maturity Value: $988,451.75

  • Monthly Deposit: $417
  • Period: 540 Months
  • Annual Interest Rate: 7.0%
  • Annual Fees: 1.5%
  • Effective Annual Return Rate: 5.5%
  • Compound Method: Monthly
  • Total Principal: $225,180.00
  • Interest Earned: $763,271.75
  • Maturity Value: $988,451.75

0.5% FEES: Maturity Value: $1,353,577.62

  • Monthly Deposit: $417.00
  • Period (Month): 540
  • Annual Interest Rate: 7.0%
  • Annual Fees: 0.5%
  • Compound Method: Monthly
  • Total Principal: $225,180.00
  • Interest Earned: $1,128,397.62
  • Maturity Value: $1,353,577.62

One last example, as of April 2019 the Vanguard S&P 500 ETF (Symbol VOO) is charging 0.03% fees. 

0.03% FEES Maturity Value: $1,575,283.04

  • Monthly Deposit: $417
  • Period: 540 months
  • Annual Interest Rate: 7.0%
  • Annual Fees: 0.03%
  • Compound Method: Monthly
  • Total Principal: $225,180.00
  • Interest Earned: $1,350,103.00
  • Maturity Value: $1,575,283.04

I STOPPED INVESTING IN MUTUAL FUNDS SOME YEARS AGO

In addition to excessive fees, research shows majority of Mutual Funds fail to beat their indexes. Every mutual fund has an index they benchmark aginast.  Example many mutual funds measure their success against the S&P 500 Index. Unfortunately, regardless of the index being measured against ~80% to 90% of mutual funds UNDERPERFORM against their indexes.  Said another way, ~80% to 90% of you will outperform mutual funds by selecting an index fund such as the S&P 500 ETF!  And as a bonus you will pay significantly lower fees.  

As you can see, after retirement, getting your annual fees as low as possible, with good investment tools, such as ETF’s is CRUCIAL!

FINDING OUT HOW MUCH YOUR 401K PLAN CHARGES IN FEES

The Department of Labor says over $17 Billion is lost in hidden fees EACH AND EVERY YEAR! Somehow hiding fees is legal, which is a discussion for another time. As a holder of a 401-K plan,  you can request a copy of the employee fee disclosure (also called the 404a5) from your existing provider. This should show all the pertinent fees being charged to your account. 

Contact your 401K Plan Administrator and request the 404a5.

YOU HAVE AN ALTERNATIVE TO ACHIEVE LOWER FEES , DIVERSIFICATION & HIGHER RETURNS – ROLL YOUR 401K TO AN IRA/ROTH IRA

In an IRA you have selections other than mutual funds, including stocks and ETF’s.  I recommend you consider ETF’s.  You may be able to find similar ETF’s to what you had selected in your 401K pool of mutual funds.  And you will find the ETF’s fees substantially lower.  

RECOMMENDATIONS FOR ALL AGES

  1. Start saving early and do whatever it takes to catch up.
  2. Avoid excessive fees.  Find out what your company’s 401K is charging in fees. If you believe it is too high (and you likely will) formerly request your company find an investment company that offers low cost ETF’s.  The squeaky wheel gets the oil.  Encourage your co-workers to do the same.
  3. Avoid any advisor who is paid commissions or is otherwise incentivized to sell you a particular investment. Find a “fiduciary” advisor who is obligated to put your interests first, and will not peddle their own proprietary investments. Get all commitments in writing! Brokers outnumber fiduciary advisors nearly nine to one.
  4. Avoid chasing expensive actively managed funds and stick with low-cost ETF index funds.
  5. Be tax efficient! Max out your tax-advantaged accounts first (401k, IRA, Roth etc).

THESE STEPS CAN LEAD TO WEALTH AND FINANCIAL FREEDOM

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DISCLAIMER

I am a proud nerd (as my beautiful wife and daughter have told me) investment and finance blogger, with a NC State, Chemical Engineering, University Rutgers, MBA and Harvard University, Advanced Management education.  

I started my first business at ~13 years of age.  am a successful investor in equities and real estate and happy to share my personal finance and investment lessons learned with you. However, I am NOT a licensed financial advisor.  Please do not construe my suggestions on this blog, as recommendations for your personal situation.  For individual finance advice please seek your own licensed CPA or financial advisors.  

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Powers Investments Management, LLC

This blog will provide, information and simple strategies, that will assist you to achieve YOUR financial objectives and long term targets. For over 30 years, I solved multi-million dollar problems, for Fortune 10-250, companies. My formal education includes: Business, Finance and Chemical Engineering {Problem Solving} at: Harvard, Rutgers and North Carolina State. And an additional 30+ years, managing my family’s investment decisions. I currently manage/advise people with net-worths ranging from the tens of thousands to several million dollars.

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