Stop Leaving Money on the Table with your 401K Account

Get my new e-book the 401K First Aid Kit:Stop your Portfolio Losses and get Back to Financial Health

Would you turn down free money? Many employers match an employee's 401(k) contributions up to a certain percent of salary. If you contribute less than your employer is willing to match, you may be passing up free money. 

According to a recent report,1 29.4 percent of 401(k) participants do not contribute enough to their 401(k) to receive their full employer match—with higher rates of foregone matches seen among younger workers age 20 to 29 (43 percent) and those automatically enrolled into an employer-sponsored defined contribution plan (41 percent). An earlier report showed that 40 percent of employees making less than $40,000 fall short of contributing the full extent of their employer's match.2 Millions of workers are leaving money—free money—on the table. 

Get my new e-book the 401K First Aid Kit:Stop your Portfolio Losses and get Back to Financial Health for tips and tricks on how to maximize your 401K balance

How NOT to Get a 100% risk free guaranteed Return on Your Money

This study show that  roughly 30% of American workers who are not contributing enough to their 401(k) plans to receive a full employer match to step up their contributions in order to meet their eventual retirement needs.

Read the article and march down to your HR department and tell them that you want to contribute the maximum amount to get your employer's matching amount in your 401K. 

This is how it works in a nutshell- You put a $1 in and your employer puts in $1- that's 100% return on your money and it is risk free. 

Now do it!  You can thank me later. 

 

 

There Will be no PINK on my Ass this Month

In case you haven't heard, October is Breast Cancer Awareness Month. That means pink ribbons, bows, t-shirts, boas, pins, etc. are in supply. Now most of this trinkets are around for you to buy and support breast cancer research. Sounds wonderful, right? Well, let's dig a little deeper. 

I would bet (please prove me wrong) that very little money from the purchase of these items actually ends up in research for a cure for breast cancer. But you know women, we love to shop and so every brand will feed your appetite to feel good about giving and so we buy all the pink hats, pins, scarfs, etc. 

Note- you don't see Prostate Cancer awareness month (which is September by the way) with this massive display of consumerism aimed at finding a cure for prostate cancer, and this cancer strikes 1 in 6 men versus 1 in 8 women will get breast cancer. 

So think twice before you reach for that pink eyelash curler at Sephora that costs extra $ for breast cancer research, or any other pink do-dad, and just give directly to the charity or research foundation of your choice. 

Now that is a using your money wisely and giving to a great cause. 

Banking Tips for Debit-Card Users

A new spate of higher banking fees will hit young people with modest balances especially hard. Here's what they need to know:

The younger generation doesn't know a paper check from a floppy disk, and its members shy away from using cash. Between school ID cards and debit cards, they have swiped their way to adulthood.

Now they are about to get swiped themselves.

Bank of America, the nation's largest by assets, recently announced it will charge most customers who use their debit cards for purchases a flat $5 monthly fee starting next year. It also is testing a new array of checking accounts with higher fees. SunTrust Banks has added a $5 monthly debit-card fee for purchases to some accounts and is raising some checking-account fees. Citigroup is raising fees and adding a $1,500 minimum balance on basic checking accounts, though there are ways around it. Wells Fargo will soon be testing debit-card fees.

An August Bankrate.com survey of the largest banks and thrifts in 25 major markets found that just 45% still offered free noninterest-bearing checking accounts, down from 76% in 2009. It also found higher average monthly maintenance fees, automated-teller-machine surcharges, overdraft fees and minimum required balances across the board.

The higher costs will hit young people with modest balances especially hard: A customer with a basic Bank of America checking account who uses a debit card to make purchases would pay $6 or $9 a month for the account, based on current test markets, plus $5 for debit-card use—or up to $168 a year.

The new and higher fees come as a regulation that took effect this month cut the average fees that merchants pay for debit transactions to about 24 cents from 44 cents. In addition, federal rules that have reined in overdraft fees have cost banks billions of dollars, which they are trying to make up in more-direct consumer charges.

The average checking account costs $250 to $300 a year to maintain, after including infrastructure, regulatory requirements, security protections and other costs, says Nessa Feddis, senior counsel at the American Bankers Association. Interest income on small accounts offsets only a little of that. "At the end of the day, revenue has to be higher than expenses," she says.

Putting your money on prepaid cards is an alternative. But many such cards come with monthly fees or individual charges for deposits or withdrawals high enough to make checking-account fees seem reasonable.

Even so, young people—and even their parents—don't have to stay in financially unhealthy relationships. The changing landscape calls for new rules for your consumer affairs.

• Know your partner. The kind of financial institution you choose can make a big difference. Credit unions are nonprofits. Online banks eschew bricks and mortar, keeping costs down. Others focus on a particular population, like USAA, which is limited to current or former members of the military and their families.

All of them may offer free checking accounts or charge much lower fees, though you still have to shop around for the right deal. In particular, be sure you have access to convenient ATMs where you won't be charged for withdr withdrawals.

• Protect yourself. Your mom always carried a quarter when she was young, so she could use a pay phone in an emergency. You should carry cash as well—ideally enough to cover the purchases you would make with a debit card. (The new debit-card fees don't apply to ATM withdrawals.)

The green stuff is still accepted just about everywhere (except for travel). It works even when the power is out, and when you run out, you run out; by contrast, if you spend more than you have using a debit card, you will pay overdraft fees. You can also write more checks, but, really, who wants to do that?

• Make a commitment. One way to save money on bank fees is to play by the company's rules and use more of its services. Just as you can save money by bundling phone and Internet services, you may be able to save on fees if you have some mix of a credit card, car loan, mortgage, brokerage account or checking account with the same bank. Banks and financial-services firms want more of your business and may reward you for it.

• Compromise. Get a travel- or cash-rewards credit card and use it smartly. Put most of your monthly purchases on the card and set aside money each week to pay for them when the bill is due. You can even pay the bill more often than once a month, if it makes you feel better. Just be sure the full amount is paid by the due date each month.

If you do it right, you might earn enough from credit-card rewards to offset bank fees—and that's the best kind of equitable relationship.

 Karen Blumenthal at karen.blumenthal@wsj.com

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The 401K loan that may cost you more than you realize

By Robert Powell, MarketWatch

BOSTON (MarketWatch) — It might not be the bank of first or last resort, but it’s a bank nonetheless. About one in four investors borrow money from their 401(k), but, while such loans have some benefits compared to other sources of credit, they also can hit your retirement savings in unexpected ways.

About 22% of plan participants who are allowed to borrow from their 401(k) have such a loan at any given time and half had used a plan loan over a seven-year horizon, according to the authors of a just-published paper, “The Availability and Utilization of 401(k) Loans.”

The probability of having a loan follows a hump-shaped pattern with respect to age, job tenure, account balance, and salary, according to John Beshears, a professor at the Stanford Graduate School of Business, James J. Choi, a professor at the Yale School of Management, David Laibson, professor at Harvard University, and Brigitte C. Madrian, a professor at the John F. Kennedy School of Government at Harvard University, who co-authored the paper.

Those likeliest to have a 401(k) loan are plan participants in their 40s, with 10 to 20 years of tenure, earning $40,000 to $60,000, with $20,000 to $30,000 in their 401(k) plan. In 2008, the median amount of these loans was $4,000.

According to David Wray, the president of the Profit Sharing/401(k) Council of America and author of “Take Control with Your 401(k),” more recent studies suggest that one in four employees eligible for a loan have taken advantage of the option, with an average outstanding balance of $8,800.

Some borrow from their 401(k) to buy a home or for home improvements. Others to consolidate bills or pay off loans (sometimes the interest rate on a 401(k) loan is lower than other, more traditional sources of credit). And still others borrow to pay for education, medical bills, weddings, divorces and cars. But no matter the reason, experts say there are several things to consider before borrowing from your plan.

Not without advantages

According to Wray, there are two big advantages to a 401(k) loan. One, if your plan has a loan program, you have the security of knowing that your money is available “just in case,” Wray said.

“This means you can comfortably make the maximum contribution commitment to your plan without worrying if you might need those funds later,” he said.

And two, loans help prevent you from depleting your retirement savings when a financial crisis occurs. “If your plan offers loans, you will be required to take a loan first before you can take a distribution because once money is taken as a distribution, it cannot be replaced.”

Cheap source of credit

If you’ve already made up your mind to spend a certain amount and the only question is how you're going to finance that spending, a 401(k) loan may be a reasonable source of financing, said Choi, a co-author of the report.

“A 401(k) loan will almost always be a better option than credit-card debt because the former's interest rate is so much lower,” he said. The interest rate on 401(k) loans is usually the prime rate plus 1%, though rates vary from plan to plan.

Others agreed. According to Steve Utkus, a principal with the Vanguard Center for Retirement Research, 401(k) loans are a relatively cheap source of credit, compared, for example, to unsecured lines of credit or credit cards. Plus, there are no credit underwriting standards. “You are borrowing from yourself — and therein lies the rub,” Utkus said.

By law, the total outstanding principal of 401(k) loans can be no larger than 50% of a participant's vested account balance or $50,000. The authors of the 401(k) study also note that participants are less likely to use loans in plans that charge a higher interest rate, and loans are smaller when plans allow fewer simultaneously outstanding loans, impose a shorter maximum possible loan duration, or charge a lower interest rate.

Besides being a source of cheap credit, Wray said there are other advantages to a 401(k) loan. There’s less paperwork to fill out as compared to other types of loans. There usually are no restrictions on how the proceeds are used. Most plans let you borrow for any reason. It’s fast.  You can receive a loan in mere days, depending on how often your plan processes transactions. And the rate of repayment for your loan may be greater than the rate of return you were receiving on your fixed investment.

Not a free loan

But cheap doesn’t mean free just because you're borrowing from yourself, Choi said. “Your 401(k) loan interest payments face double taxation, since they are made with after-tax dollars and then get taxed again when you withdraw them in retirement,” said Choi. “And of course, whatever balances you spend now aren’t earning an investment return for you.”

Other experts share Choi’s point of view. “401(k) loans can be an important resource for participants facing financial hardship,” said Lori Lucas, a CFA charterholder, an executive vice president at Callan Associates, and chair of the Defined Contribution Institutional Investment Association’s research committee.

“The danger is when they are overused for non-essential purposes,” she said. “Participants pay back 401(k) loans with after-tax money. And, they become withdrawals if they go unpaid.”

Make sure your job is safe

Also, before taking a loan from your 401(k), consider how safe your job is. That’s because one of the dangers of a 401(k) loan is that if you leave your job or are laid off, you have to pay the loan off in full within a short period of time, usually 60 to 90 days, said Choi.

The greatest risk with loans is if they don't get paid off, said Stacy Schaus, a senior vice president at PIMCO.

“Any balance you haven't paid off at the end of that time is considered an early withdrawal, and if you're younger than 59 ½, you'll have to pay income tax on that amount plus an extra 10% tax penalty,” Schaus said. “Unless your job is very secure and you plan on staying with your employer for the duration of the loan, borrowing large amounts from your 401(k) is risky.”

Lucas agreed, and warned about a feature of some 401(k) plans. “While some plan sponsors allow repayment of plan loans after termination, most do not,” said Lucas. “Taxes and penalties can take a huge bite out of participants' assets if the loan becomes a withdrawal. Further, withdrawn money is then forever lost to the retirement system.”

To be fair, the odds are high that you’ll repay the loan, according to Vanguard’s Utkus. According to his and other research, 90% of loans are repaid.

Still, one in 10 won’t repay their 401(k) loan, more often than not due to a job change. Since you don’t know whether you’ll be among the one in 10 who don’t pay back their loan or the nine in 10 who do, Utkus offered this advice: “If you anticipate changing jobs in the near term, I'd steer away from taking a loan, unless you have money outside the plan to pay off the loan when it becomes due.”

Other disadvantages

Dave Tolve, retirement business leader for Mercer's U.S. outsourcing business, said borrowing from a 401(k) can have major consequences — even when repaid on time.

And plan participants should consider the advantages of not taking a loan. For instance, your money can keep growing. Plus, if you take money out of your account, even temporarily, you will miss out on valuable compounding and may end up with a significantly smaller nest egg by the time you retire. And, it is much easier to continue saving without the burden of a loan.

“Many people find it hard to continue making regular 401(k) contributions while repaying their loan — making it even harder to get back on the path to preparing for their retirement,” Tolve said.

Wray identified another disadvantage: 401(k) loans are not without fees. Some eight in 10 plans charge a one-time loan fee — of about $72 on average. Another 28% of plans charge an annual service fee of $35 on average. Plus, you may need to get your spouse’s permission for a loan.

Bottom line? “The long-term benefits of not touching your retirement savings may far outweigh the short-term benefits of taking the loan,” Tolve said. “Although it may seem easy to take a loan from your plan now, there may be other alternatives with lower interest rates that are available to you. Be sure to consider the impact a loan may have on your financial future and explore other options before you borrow from your plan.”

The study, “The Availability and Utilization of 401(k) Loans,” can be found at this National Bureau of Economic Research website.

Pa

Magic (The Gathering) and Lifestyle Design

When I was in my late teens, I got sucked into a game called Magic [The Gathering]. I’ll just presume you already have some familiarity with the game. At first I resisted because it seemed to require a lot of money in order to play but soon everybody was playing and so I started too.

Eventually I found myself disenchanted with the game. I was playing a combination of black and blue and I always seemed to be losing to people who had better and rarer cards than I had. I didn’t really see myself as improving my relative position unless I began to spend a lot of money either buying booster packs and hoping for the best or buying them outright at $5 or $10 a piece from the local card pusher.

Back then nobody I played with really seemed to have any kind of deck design strategy other than picking a few colors and including the biggest and most powerful cards they had.

Most games would be very long. Not much would happen during the first 4 rounds as people were putting down lands in order to summon their first mega monster. After that it was a half hour accumulation of a giant army.

Does this sound familiar? Keeping up with the Joneses? Bigger and better?

One evening after I was just about to give up on the game, I decided to divide my blue-black deck. It happened to be about 110 cards total, so I had to add some land to make it 60 cards.

And then I started winning! The game was fun again.

Having more land allowed me to summon forces faster. I was no longer stuck waiting for resources much like a middle-class consumer is stuck waiting for money because everything he owns is too large or too costly. Since I was using almost all my black cards, I also had to include lighter footprint creatures which turned out to be a blessing. I was dealing out 5-10 points of damage (20 points and you win the game) before my friends even got a creature in play.

This was a light bulb moment and I began to pay a lot more attention to the deck design strategy: what worked together with what? what was the ideal land/spell/creature mix? could I put something together that had more than one theme in case my main theme failed. I spent hours dry-running designs (that’s the MTG equivalent of studying chess openings).

At one point the deck got so good that my regular playing partners didn’t think I was fun to play with anymore. The deck which was worth about $50 if you had to buy the cards from a pusher was even offering fighting resistance to tournament decks. I then started making decks out of common cards. These are typically less powerful and abundantly available. I was still doing okay with that.

There’s a lesson to be learned here.

Strategy beats “technology” every time. Having ready resources like land (money) is much better than having large creatures (house, car) which are unwieldy. Having a huge deck (lots of stuff) is very detrimental because it reduces control. Having too much stuff takes away attention from the enemy (living your life) because the entire focus is on maintaining and trying to summon your forces (paying the bills). Using a systems thinking approach to ensure resilience is a successful strategy—if one thing doesn’t work, another will.

by Jacob Fisker- at Early Retirement Extreme