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Category: 401(k)

Secure in your 401(K)?

As is customary with our family, we had a (mandatory) New Year’s Day dinner celebration. It’s a wonderful time when the six of us (are forced to) share highlights and lowlights of the prior year and share our hopes and dreams for the year ahead. It went something like this,

Billy:           “Okay, welcome to the 2023 McCarthy Family New Year’s Dinner!

       First, I’d like to thank you all for…” [Interrupted by son #4]

#4:             “Hey dad, let me guess, you’re going to get in shape, eat better, and sleep more.

                     Please pass the meat.”  

I took the liberty of removing the distraction of food from son #4’s personal space and allowed him to listen to the rest of the family’s plans for 2023 unincumbered, that is, until I was over-ridden.  And while I might resemble his remarks, he left out at least one important component. The part where I learn from my mistakes.  

Over committing on resolutions isn’t uncommon and underperforming on them likely isn’t either. Missteps with your finances, however, can run the gamut from inconsequential to nearly catastrophic. Anybody relate?  Hopefully, you have more experience with the former. But life happens. We all make mistakes and sometimes they’re expensive. So what housekeeping tips would we offer for 2023 that may keep you from making costly decisions?  And what’s new for 2023 and beyond that you should be aware of?  Let’s start the year off with a little Retirement Account Housekeeping, shall we? (We’ll substitute Retirement Account with 401(k) for simplicity’s sake.)  

401(k) Housekeeping Tip #1:  

Max the Match.  If you’re currently participating in a retirement plan that has an employer matching contribution component, whereby they’ll match a percentage of your contribution up to a certain percentage of your compensation, I’d encourage you to capitalize on this benefit and max the match. Here’s how it works:  Maybe your employer matches 50% of your contribution up to 6% of your compensation. If you contribute 6% of your compensation, you’ll be maxing the match , as they say. By putting in 6% of your compensation into your 401(k), you’ll receive a 3% match from your employer (50% of 6% = 3%). There’s a technical term we use in the advisory world for that. It’s called:  free money [from the Latin freebieus cashus].  And if you’re maxing the match, that means you’ll be getting all the free money that’s available to you.  Check with your administrator today on what your plan may provide for.

The mistake to learn from:  Jack didn’t max the match and missed out on free money.

401(k) Housekeeping Tip #2:  

If your plan allows you to contribute a percentage or a fixed dollar amount, contribute a percentage. Why so?  Okay work with me:  Let’s say that throughout your career, you’ve made a good impression on the right folks and have found yourself making a good deal more money than when you started. And let’s say you chose to have a fixed dollar amount deposited each pay period. Anybody see the problem? (I’ll wait.) The amount you’re saving isn’t increasing along with your income is it?  No. The fixed dollar amount is – fixed.  You’re putting in the same dollar amount at with an income of $150,000 that you were putting in when you earned $50,000. Had you put in a percentage of your pay, your contributions would be increasing relative to your income. That means more money with more time in the market. And that’s not even considering an employer match. If you’re fortunate enough to have employer contributions being made on your behalf, maxing the match may allow for an even greater amount of savings. Use a percentage, not a fixed dollar amount.

The mistake to learn from:  Jack used a fixed dollar amount and missed out on increased retirement savings and the potential for additional compounding returns.

401(k) Housekeeping Tip #3:

If you have an old 401(k), 403(b) 457(b) or other employer sponsored retirement account, you may be able to transfer that account into your existing plan. Ask your plan administrator about your specific situation. You may even consider rolling that old balance into an IRA  to take advantage of different investment options and services. Sure, why not, right? What you don’t want to do, is leave it somewhere and forget about it.  I’m willing to venture that some of you have old retirement accounts out there, somewhere, and you’re unaware of the balance and of how it’s invested. Am I right? And of course, you don’t want to just “cash it out” without very careful consideration. While you may feast on an immediate influx of cash, you may also enjoy a side of premature distribution and the accompanying 10% penalty if you’re under 59.5. And any pre-tax distribution made will be added to your taxable income for the year in which it was taken.  Speak with your advisor or tax preparer about your particular situation if you’re considering a cash distribution.

The mistake to learn from: Jack didn’t do anything with his old account and eventually forgot he had one. Lots of potential for missed opportunity. 

401(k) Housekeeping Tip #4

Let’s talk about your beneficiary. Do you know who your beneficiary is for your 401(k)?  If you paused for even half a second, you need to check. Make sure you know who you’ve listed as the primary beneficiary of your 401(k).  Here’s why. The beneficiary designation on your 401(k) is the last will and testament for what one day, could be your single largest asset. And once you’re gone – as in dead – it’s too late to change it.  And that goes for insurance policies, too. So check your insurance policy beneficiaries while you’re at it. Go ahead. I’ll wait. It’s that important. Maybe even the most important aspect of your 401(k).

The mistake to learn from: Jack never checked his beneficiary after his divorce. Jack died. Jack’s ex-wife soon bought a new car…and a new garage to put it in…that came with a new house.

401(k) Housekeeping Tip #5: 

Be aware of changes that could affect your retirement. A new bill was signed into law at the end of last year that you should be familiar with. It’s the Secure Act 2.0. Yes, it does sound familiar, doesn’t it?  That’s because the first SECURE (Setting Every Community Up for Retirement Enhancement) Act was signed into law in 2019. Hence, the need for its clever surname – 2.0.  

While there are over 90 new retirement plan provisions, I’ll not cover them all. In fact, I’m just going to mention a few published online earlier this year by Investopedia, titled Secure Act 2.0 Act of 2022. Some will take effect in 2023, of course, while others not until 2024, 2025 and even 2033.

401(k) Auto Enroll

Beginning in 2025, Section 101 of the act requires employers to automatically enroll eligible employees into 401(k) or 403(b) plans with a minimum participation amount of 3% but no more than 10%. The percentage will increase 1% per year up to a minimum participation amount of 10% and a maximum of 15%. That said, employees will be able to opt out of the plan if they wish, or select a different contribution percentage. This auto-enroll requirement only applies to new plans in 2025 – not existing 401(k) plans. There are some businesses that are exempt from this provision. (Small businesses with 10 or fewer employees, new business (less than 3 years old), church and government plans.  (U.S. Senate, Committee on Finance. “SECURE 2.0 Act of 2022 Summary,” Page 1.)

RMD Age Change: Section 107 increases the RMD age from 72 to 73. This change takes effect on January 1, 2023. The RMD age will change again in 2033 to 75. (U.S. Senate, Committee on Finance. “SECURE 2.0 Act of 2022 Summary,” Page 2.)

Pre-Death RMD: Section 325 eliminates the pre-death RMD for the owner of a Roth-designated account in an employer 401(k) or other retirement plan. Under current law, required minimum distributions are not required to begin prior to the death of the owner of a Roth IRA, although pre-death distributions are required in the case of the owner of a Roth-designated account in an employer retirement plan. This provision takes effect for taxable years beginning after December 31, 2023. (U.S. Senate, Committee on Finance. “SECURE 2.0 Act of 2022 Summary,” Page 13.)

Catch-Up Contributions: Section 108 indexes the $1,000 catch-up contribution for savers age 50 and above to the IRS cost-of-living-adjustment (COLA). This provision is effective January of 2024 (U.S. Senate, Committee on Finance. “SECURE 2.0 Act of 2022 Summary,” Page 2.)

Catch-Up Contributions for those aged 60 to 63: Section 109 substantially increases catch-up limits for 401(k), 403(b), and 457 plan participants aged 60 to 63 to the greater of $10,000 or 150% of the “standard” catch-up amount for that year, beginning January, 2025.  (U.S. Senate, Committee on Finance. “SECURE 2.0 Act of 2022 Summary,” Page 2.)

Catch-Up Contributions for those making more than $145,000 per year: Section 603 requires that beginning in January of 2024, catch-up contributions to your plan must be made with Roth (after-tax) dollars. (U.S. Senate, Committee on Finance. “SECURE 2.0 Act of 2022 Summary,” Page 18.)

Other: The Act also has provisions for natural disasters, domestic abuse, a Roth emergency savings account, and even a once per year, penalty free withdrawal up to $1,000 for personal or family emergency expenses.

For more information on how these provisions may apply to you, contact your 401(k)-plan administrator.

The mistake to learn from:  Jack didn’t keep up with his benefits and missed out on opportunities to better his retirement.

One of the better quotes on mistakes comes from artist, Bob Ross, who said, “There are no mistakes, just happy accidents.” Sure, that may be true if you’re trying to paint a tree. And since Bob Ross isn’t your financial advisor, let’s go with this one, “Mistakes are much less painful when you learn from someone else having made them.”

Moral of the story when it comes to your retirement:  Don’t be a Jack.

To learn more about CapSouth Wealth Management visit our website at capsouthwm.com/what-we-do/ or Connect With Us to learn more about our process.

By: Billy McCarthy, Wealth Manager

CapSouth Partners, Inc, dba CapSouth Wealth Management, is an independent registered Investment Advisory firm. Information provided by sources deemed to be reliable. CapSouth does not guarantee the accuracy or completeness of the information. CapSouth does not offer tax, accounting or legal advice. Consult your tax or legal advisors for all issues that may have tax or legal consequences. This information has been prepared solely for informational purposes, is general in nature and is not intended as specific advice. Any performance data quoted represents past performance; past performance is no guarantee of future results. This article contains external links to third party content (content hosted on sites unaffiliated with CapSouth). CapSouth makes no representations whatsoever regarding any third party content/sites that may be accessible directly or indirectly from this article. Linking to these third party sites in no way implies an endorsement or affiliation of any kind between CapSouth and any third party, including legal authorization to use any trademark, trade name, logo, or copyrighted materials belonging to either entity.

401k Participant Update: Q & A with a 401k Advisor

By: ANTHONY MCCALLISTER, AIF®, J.D., Senior VP, Wealth Advisor

We have held many 401(k) group meetings, one-on-one meetings, and phone calls with 401k participants this year. Understandably, participants are concerned with the markets and their 401(k) accounts. What follows are a couple of the common questions we’ve been asked and our general responses. 

Question:

I am tired of contributing to my 401k and seeing it decline in value.  Should I stop funding my 401k until the market stabilizes?

Answer:

We generally believe it best to continue contributing to your 401k to take advantage of dollar cost averaging.  Contributing consistently is an important step in preparing for your retirement.  You control your payroll deductions directly from your paycheck, helping to make this a simple and effortless process.  Coupled with the principle of dollar cost averaging, this consistent payroll deducted contribution into your 401k throughout your working career can help you reach your retirement goals.  Dollar cost averaging is the investment of equal amounts of money at standardized points over time, regardless of the price of the underlying securities.  This can lower the impact of price volatility, as we are experiencing currently, and can lower the average cost of the investments being held.

Question:

My account has declined in value this year.  Should I move my account into something safe (i.e., the money market, stable value, guaranteed account, or other cash equivalent) until I see the market rebound and I feel better about it? 

Answer:

While everyone’s situation is different, we do not recommend trying to time the market; we believe it is better to focus instead on long-term investing.  Timing the market includes when an investor moves some or all of their stock investments to cash in an attempt to avoid a market decline and with the hope of later reinvesting into a market rebound.  While this sounds like a good strategy, this requires a participant to make two correct decisions: when to sell and when to buy.  In the previous 12 bear markets of the S&P 500 Index, the index had positive returns a year following entering the bear market in all instances but three.  The average one-year return was 23.9%.  But reviewing each of these 12 bear markets individually on a one-month, three-month, six-month, and one-year basis, the returns they experienced differ significantly, making timing when to enter back into the market very difficult.   (https://www.wsj.com/livecoverage/stock-market-today-dow-jones-bitcoin-fed-rates-06-14-2022/card/how-the-s-p-500-performs-after-closing-in-a-bear-market-yBwgfJwW8HGSNJaKg6LB).

It is very difficult to time when to leave the market to avoid market declines.  It is equally as difficult to determine when to reinvest an account at the opportune time in order to experience any market rebound.  We believe the best course of action is to maintain an appropriate, diversified mix of stocks and bonds, investing for the long-term in light of a dynamic plan for reaching your retirement goals.

In these difficult markets, we recommend holding fast to investment principles of resisting the urge to sell equities into declining markets, not attempting to time the market, focusing on investing with a long-term financial plan in mind, and continuing saving through dollar cost averaging.   Do not hesitate to contact your CapSouth Financial Advisor to schedule a time to discuss your individual situation and to review your accounts.

(See: https://am.jpmorgan.com/us/en/asset-management/adv/insights/market-insights/market-updates/on-the-minds-of-investors/is-market-timing-worth-it-during-periods-of-intense-volatility/).

CapSouth Partners, Inc, dba CapSouth Wealth Management, is an independent registered Investment Advisory firm. Any opinions expressed in the material are those of the author and are not presented as facts. Information provided by sources deemed to be reliable. CapSouth does not guarantee the accuracy or completeness of the information. CapSouth does not offer tax, accounting or legal advice. Consult your tax or legal advisors for all issues that may have tax or legal consequences. This information has been prepared solely for informational purposes, is general in nature and is not intended as specific advice. Any performance data quoted represents past performance; past performance is no guarantee of future results. The S&P 500 Index is an unmanaged, capitalization-weighted index that measures the performance of 500 large capitalization domestic stocks representing all major industries. Indices do not include fees or operating expenses and are not available for actual investment. This article contains links to third party content (content hosted on sites unaffiliated with CapSouth Partners). CapSouth makes no representations whatsoever regarding any third party content/sites that may be accessible directly or indirectly from this article. Linking to these third party sites in no way implies an endorsement or affiliation of any kind between CapSouth and any third party, including legal authorization to use any trademark, trade name, logo, or copyrighted materials belonging to either entity.

Shocking Reality of 401(k) Saving

I have likely spoken to thousands of 401(k) participants over the past four to five years, in either group meetings or in one-on-one review meetings. The shocking revelation I received is the fundamentals of 401(k) saving do not change.  These best practices, when exercised in a healthy financial environment, can assist a family in accomplishing their retirement goals.  

When I find myself in front of participants, I do not preach the gospel of 401(k)s… I preach saving and preparing for life events.  Your company’s retirement plan is only one of the many tools that you can use to accomplish your goals. Regardless of whether you save in 401(k)s, IRAs, ROTHs, real estate, or other vehicles, the main goal is to earmark dollars for retirement. 

So, the beginning of any conversation is always, “Where do you want to go? What do you want to do? How are you going to get there?”  Amazingly, if you login to your 401(k)’s website, you are normally provided all the tools you need to calculate and model your current financial position and what steps you need to take to replace a portion, or all, of your current income in retirement.  We are all moving somewhere in life.  All retirement plan participants should determine where they want to go and develop a plan to get there.      

Most well laid plans can easily be undermined if we fail to build the proper foundation.  The foundation needed in this case is paved with margin.  Margin is the space you build between your needs and wants, and it provides the proper footing to establish your financial plan.  We recommend striving to live on 75% to 80% of your family’s gross income.  This will make available 20% to 25% of your gross income to save for retirement, for college, for rainy day funds, or for charitable undertakings.  This may require a period of reducing your spend rate, snowballing credit card debt, or increasing earning ability.  Once the margin is built, it will provide the capacity to fund present and future needs and wants.     

In the meantime, develop the habit of savings.  A saving plan normally works best when it is automated.  “We should automate the important.” In normal situations, automating savings moves it from a manual undertaking to an automatic arrangement which puts it out of mind, out of sight. When we do this, we adjust our standard of living accordingly, and then move on with our lives.  Experts say we need to earmark 10%-15% of our gross income towards retirement.  How do we do this?  Start somewhere, anywhere.  And then increase your contribution 1% every six-months or annually.  So, how do we get to a 10%-15% savings rate, “1% at a time”.

These foundational 401(k) savings tips can be applied almost universally across the 401k landscape.  Developing a financial plan to live your best life, building in the foundation of margin, and developing the habit of saving provides a firm footing to reach our retirement goals.  We are all headed towards a date where we will need to live on a stream of income.  Becoming good savers today will make the journey and destination better.

Article by: ANTHONY MCCALLISTER, AIF®, J.D.

To learn more about CapSouth Wealth Management visit our website at www.CapSouthWM.com

If you would like to discuss your 401(k) savings options, request an appointment at www.CapSouthWM.com/contact  or contact our office at 800.929.1001. 

CapSouth Partners, Inc., dba CapSouth Wealth Management, is an independent registered Investment Advisory firm.  This material has been prepared for planning purposes only and is not intended as specific advice. CapSouth does not offer tax, accounting or legal advice. Consult your tax or legal advisors for all issues that may have tax or legal consequences.

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