MONEY Savings

Millennials Are Hoarding Cash Because They’re Smarter Than Their Parents

Cash under mattress
Zachary Scott—Getty Images

Sure, young adults could get higher returns by investing in stocks, but many have good reasons to stay safe in cash right now.

Another day another study about the short-comings of Millennials as investors. This time around, Bankrate.com weighs in—data from their latest Financial Security Index show that 39% of 18-29 year-olds choose cash as their preferred way to invest money they won’t touch for least 10 years. That’s three times the percentage that would choose stocks.

“These findings are troubling because Millennials need the returns of stocks to meet their retirement goals,” says Bankrate.com chief financial analyst Greg McBride. “They need to rethink the level of risk they need to take.”

Bankrate.com is not the only group trying to push Millennials out of cash and into stocks. Previous surveys have scolded young adults for “stashing cash under the mattress,” being as “financially conservative as the generation born during the Great Depression,” and more being “less trustful of others”—in particular financial institutions and Wall Street. (You can find these surveys here, here and here.)

These criticisms are way overblown. It’s simply not true that Millennials are uniquely averse to equities—many are investing in stocks, despite their responses to polls. As for cash holdings, keeping a portion of your portfolio liquid is simply common sense, though you can overdo it.

Here’s what’s really going on:

  1. Millennials are not much more risk averse than older generations. In the wake of the financial crisis, investors of all ages have been keeping more of their portfolios in cash—some 40% of assets on average, according to State Street’s research. Baby Boomers held the highest cash levels (43%), followed by Millennials (40%) and Gen X-ers (38%). That’s not a wide spread.
  2. Many Millennials do keep significant stakes in equities. This is especially true of those who hold jobs and have access to 401(k) plans. That’s because they save some 10% of pay on average in their 401(k)s, which is typically funneled into a target-date retirement fund. For someone in their 20s, the average target-date fund invests the bulk of its assets in stocks. Thanks to their early head start in investing, these young adults are an “emerging generation of super savers,” according to Catherine Collinson, president of the Transamerica Center for Retirement Studies.
  3. Young adults who lack jobs or 401(k)s need to keep more in cash. Most young people don’t have much in the way of financial cushion. The latest Survey of Consumer Finances found that the average household headed by someone age 35 or younger held only $5,500 in financial assets. That’s less than two months pay for someone earning $40,000 annually, barely enough for a rainy day fund, let alone a long-term investing portfolio. Besides, that cash may be earmarked for other short-term needs, such as student loan repayments (a top priority for many), rent, or more education to qualify for a better-paying job.

There’s no question that young adults will eventually have to funnel more money into stocks to meet their long-term right goals, so in that sense the surveys are right. But many are doing better than their parents did at their age—the typical Millennial starts saving at age 22 vs 35 for boomers. And if many young adults hold more in cash right now because they’re unsure about their job security or ability to pay the bills, there are worse moves to make. After all, it was overconfidence in the markets that led older generations into the financial crisis in the first place.

MONEY 401(k)s

Millennials (With Jobs) Are Super Saving Their Way to Retirement

Laptop with cord in shape of piggy bank
Atomic Imagery—Getty Images

Young adults are outpacing Baby Boomers and Gen X when it comes to getting a head start on their 401(k)s.

You may have heard that Millennials are taking saving more seriously than Gen X-ers and Baby Boomers did at their age. But their financial prospects look much worse, given student loan debts, high unemployment, and shaky entitlement programs.

No question, Millennials face steep challenges. But it turns out, twenty-something savers who managed to land jobs (some 74% of this age group) are doing even better than you might have thought—and they’ve built a huge head start toward retirement security.

Those are the findings of a just-released study by Transamerica Center for Retirement Studies, which surveyed more than 1,000 Millennials in the work force. “Millennials have seen what happened to their parents, many of whom lost their jobs and savings in the financial crisis—and they are taking steps to avoid a similar outcome,” says Catherine Collinson, president of the Transamerica center. “We’re seeing an emerging generation of retirement super savers.”

Millennials have also benefitted from the widespread adoption of 401(k) auto enrollment, automatic contribution hikes, and target date funds, Collinson says. Some 71% of Millennials who are offered a 401(k) end up joining their plan. By being enrolled into 401(k)s as soon as they start their jobs (unless they opt out), many Millennials are being nudged onto the retirement savings path sooner than previous generations.

How much sooner? Some 70% of Millennials started saving for retirement at an unprecedented young age, just 22, the survey found. By contrast, the average Boomer began saving at age 35, while Gen Xers got started at 27.

Transamerica’s findings show that Millennials are contributing an average 8% of salary to their 401(k) plans; adding an employee match, they’re stashing a solid 10% of income into their accounts. Those findings echo earlier surveys of young adults, which have found that Millennials are saving more.

Those contribution rates are especially impressive, given that Gen X savers are putting in just 7% of pay before the match on average. Boomers are saving at a higher rate, 10% before the match, but they also have higher pay on average and are facing a looming retirement date. Some 27% of Millennials also said they raised the amount they contributed in the past 12 months vs. just 7% who decreased it.

Thanks to this early savings start, Millennials have amassed an average $32,000 in their 401(k) accounts, according to Transamerica. And unlike older generations they are relying heavily on professional advice to invest their money—some 62% use a managed account or target date fund, vs just 47% of Boomers and 56% of Gen X-ers.

Of course, most young adults have plenty of shorter-term financial worries. Some 27% say their top priority is covering basic living experiences, and 27% say they want to pay off debt. Only 16% listed saving for retirement as a top concern. Complicating matters, three in 10 expect to provide support for their aging parents or other family members.

Even so, Millennials are optimistic about their retirement prospects. A whopping 60% expect to retire at age 65 or sooner. That’s a stark contrast to the majority of Baby Boomers (65%) and Gen X (54%), who plan to work past retirement or never retire. But Millennials share the expectations of older generations in other ways—half plan to work the job in retirement, either full time or part time. When it comes to staying busy in retirement, there’s not much of a generation gap.

MONEY Longevity

3 Ways to Make Your Money Last As Long As You Do

"Fountain Of Youth" Billboard
Micheal McLaughlin—Gallery Stock

With lifespans on the rise, you may be sticking around for more years than you imagined. Time to revise your retirement plans. These moves can help.

When it comes to retirement planning, you have to make a lot of educated guesses—how much income you’ll need, what your portfolio will earn. But the most crucial unknown is how long you’ll live, and how many years you have to stretch out your savings.

Lifespans have been steadily increasing, thanks primarily to better health care and nutrition. The Society of Actuaries, which creates mortality tables for pension funds and financial services firms, recently announced plans to revise its numbers—­extending the average lifespan for a 65-year-old to 88, vs. 86 in 2002.

Some demographic groups have benefited more than others. Those with college degrees, for example, typically live two to three years longer than average, says Jay Olshansky, professor of public health at the University of Illinois. “Educated Americans tend to have more wealth and better access to health care,” he says.

Your own lifespan will depend on more than a college degree. Your family history, how often you exercise, and whether you smoke all come into play. For an estimate, try the calculator at ­livingto100.com. Even if you aren’t ­headed for the century mark, you need to make your money last as long as you do. These moves can help:

Aim far, within reason. If you’re healthy and have long-lived parents, figure on living longer than average. That may seem daunting once you click on a retirement calculator—getting to 95 with a 90% likelihood of maintaining your income requires serious saving. Don’t let that discourage you. Achieving a 90% success rate often means passing unspent wealth to heirs, says Michael Kitces, director of planning research at Pinnacle Advisory Group. In the event you fall short, cutting back modestly may not be a hardship since seniors tend to spend less as they age. “Be conservative about your longevity, but don’t overdo it,” says Kitces.

Cover the basics. Putting some of your portfolio in an immediate annuity will give you a regular stream of payments throughout your lifetime. Many advisers suggest using them, along with Social Security, to cover your essential expenses. Recently a 65-year-old man could purchase a $100,000 annuity paying 6.6%, according to ImmediateAnnuities .com. Those rates, while low historically, outshine bond yields. “It makes sense to buy now if you need an annuity,” says Joe Tomlinson, a financial adviser in Greenville, Maine. “If you hang on to your cash and wait for a rate hike, you’ll be earning zero percent, so you probably won’t come out ahead.”

Take a walk. When you stay healthy and active, studies show, you’re far more likely to avoid expensive medical problems, not to mention long-term-care costs. As a recent article in JAMA found, people in their seventies and eighties who exercised regularly, including walking and weight training, were 18% less likely to suffer physical infirmities and nearly 30% less likely to become permanently disabled. A fit old age not only saves money. It’s more fun too.

MONEY 401(k)s

This Nobel Economist Nails What’s Really Wrong with Your 401(k)

Robert Merton, a Nobel laureate and finance professor at the Massachusetts Institute of Technology
MIT professor Robert Merton John Hanna—AP

Retirement plans are doing it all wrong, says Robert Merton. He ought to know. His hedge fund nearly brought the down the global economy.

In the 30-plus years since 401(k) plans were first introduced, they’ve faced criticism for everything from the risks employees face to the fees they pay to poor investing options. Now Robert Merton, a Nobel Prize-winning economist, says 401(k)s are headed for a crisis.

If anyone should know about a potential crisis, it’s Merton. Along with his fellow Nobel laureate Myron Scholes, Merton co-founded and sat on the board of Long-Term Capital Management, a hedge fund that was managed based on complex computer models. Under the leadership of co-founder John Meriwether, LTCM’s massive failure nearly brought down the global economy in 1998.

Now Merton is saying that 401(k)s are headed for trouble, but for very different reasons. In particular, he argued at a recent Pensions & Investments conference, 401(k)s take exactly the wrong approach to retirement investing by emphasizing account balances and investment returns, thereby encouraging savers to amass the largest portfolio possible, which pushes them to take too much risk. That’s an approach he calls “la-la land.”

Instead of focusing on wealth creation, 401(k)s should emphasize the level of income employees can expect to receive in retirement, Merton says. By knowing whether they are on track to that goal, workers will make better saving and investment choices.

One of the best ways to be assured of steady future income is to invest in an inflation-adjusted annuity, Merton says. But current 401(k) regulations do not allow deferred annuities as an investment option. Merton argued in a recent Harvard Business Review article that this barrier should be changed.

Meanwhile, workers are encouraged to invest in Treasury bills for safety, which they appear to deliver — if you look at year-by-year returns. But if you consider the income that T-bills would provide in retirement, as measured by the amount of deferred annuity income they would purchase, they are nearly as risky as the stock market. “The seeds of the coming pension crisis lie in the fact that investment decisions are being made with a misguided view of risk,” Merton writes.

Even so, he isn’t recommending that investors hold only deferred annuities to achieve their income goals. Instead, he suggests investing in a mix of stocks as well as bonds and deferred annuities. Over time, that asset allocation should shift based on the likelihood of achieving the investor’s income goal. At retirement, the worker would have enough money to buy an annuity that would provide the target salary replacement amount. But the choice would be left up to the employee. Still, Merton clearly has an opinion about what option is best, as a recent MarketWatch article noted. “When we take a risk, it’s generally for a good reason. You wouldn’t normally put yourself in harm’s way for no reason,” Merton writes.

Problem is, figuring out the right portfolio strategy, and when to make those shifts, is a tough challenge for the average investor. And not so coincidentally, Merton has a solution, which is to rely on professsional investment managers to handle this for you. An MIT professor, Merton is also the “resident scientist” at Dimensional Fund Advisors, which offers a 401(k) plan that focuses on producing a reliable income stream. (For more on DFA’s approach, see “The End of Investing.”)

The DFA connection aside, Merton’s insights are well worth considering. Along with Scholes, he won the Nobel in 1997 for a landmark options-pricing theory, called the Black-Scholes model, that is still widely used. (Economist Fisher Black passed away before the Nobel was awarded.) And in his call for 401(k) reforms, Merton has plenty of company. A growing number of academics and 401(k) providers advocate an income approach. So does the U.S. Labor Department, which intends to require plan providers to present investors with statements showing their projected income in retirement. Some investment groups already do.

Even if your 401(k) plan doesn’t offer income projections, you can get find calculators online that will give you estimates. Just remember, they are only projections, and if you don’t keep checking your assumptions, models can steer you astray. Just ask Robert Merton.

Update 7/1: The U.S. Treasury today approved the option of deferred annuities in retirement plans.

Related story: The New 401(k) Income Option That Kicks In When You’re Old

 

MONEY long term care

The Retirement Crisis Nobody Talks About: Long-term Care

If you become disabled, you may face huge bills for daily help. And, no, Medicare doesn't cover it.

When you try to gauge the biggest risks to your financial security in retirement, health care costs usually top the list. But there’s even bigger danger that doesn’t get as much attention: long-term care costs.

By whatever measure you use, many Americans aren’t saving enough for retirement. In its latest annual retirement readiness study, the Employee Benefit Research Institute found that some 57% to 59% of Baby Boomer and Gen X households are on track to retire comfortably. But if you factor in long-term care costs, the percentage of households running short of money in retirement soars by 100% or more after 20 years for those in middle-class or upper-income quartiles, according to new study by EBRI. The analysis assumes that Baby Boomer and Gen X households will retire at 65 and spend average amounts for food, housing and other living expenses, in addition to long-term care costs.

The risk of falling short financially is highest for those in the lower-income quartile—by the 10th year of retirement, some 70% in this group would have run short of money, according to EBRI, though the majority were already headed for trouble because of lack of savings. But even households in the highest-income quartile saw the percentage falling short reach 8% by the 20th year of retirement vs. just 1% without accounting for long-term care.

If you become disabled, the costs of assistance with daily living tasks (what’s commonly referred to as long-term care) aren’t generally covered by Medicare. That’s something many people don’t realize. A nursing home in the Midwest might run you $60,000 a year, while the median salary for a home health aide may be $45,000 annually. Some 70% of Americans age 65 and older are expected to need long-term care at some point in their lives. And studies have found that many families end up paying huge amounts out of pocket, as much as $100,000 in the last five years of life.

Planning ahead can help, but unfortunately there are few solutions to the long-term care dilemma. One alternative is to purchase long-term care insurance, but it’s pricey, so few can afford it. “Long-term care insurance is something that nobody wants to buy and the insurance industry doesn’t want to sell,” says Howard Gleckman, senior fellow at the Urban Institute and author of “Caring for Our Parents.” In recent years, many insurance companies have raised premiums on long-term care policies. And other insurers have gotten out of the business—that’s mainly because fewer buyers than expected are dropping policies, and low interest rates have reduced profits.

Another option is Medicaid, which many seniors end up relying on to pay for long-term care. But in order to qualify you will have to spend down most of your assets—not anyone’s idea of a dream retirement. And as more aging Boomers and Gen X retirees require care, Medicaid programs will come under increasing financial pressure, Gleckman says, so it’s not clear what the programs will provide in 20 years.

Until more options develop—perhaps some kind of private-public partnership for long-term care—your best strategy is to stay healthy, save as much as you can, and build a community network. People with strong social ties, research shows, live longer, happier lives.

This article was updated to clarify the percentage of households facing shortfalls in retirement due to long-term care costs.

MONEY retirement income

To Invest for Retirement Safely, Know When to Get Out of Stocks

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Bill Bernstein Joe Pugliese

Investment adviser William Bernstein says there's no point in taking unnecessary risks. When you near retirement, shift your portfolio to safe assets.

A former neurologist turned investment adviser turned writer, William Bernstein has won respect for his ability to distill complex topics into accessible ideas. After launching a journal at his website, EfficientFrontier.com, he began writing numerous books, including “The Four Pillars of Investing” and “If You Can: How Millennials Can Get Rich Slowly.” (“If You Can,” normally $0.99 on Kindle, is free to MONEY.com readers on June 16.) His latest, “Rational Expectations: Asset Allocation for Investing Adults,” is written for advanced investors. But Bernstein, who manages money from his office in Portland, Oregon, is happy to break down the basics.

Q. Retirement investors have traditionally aimed to build the biggest nest egg possible by age 65. You recommend a different approach: figuring out how much you’ll need to spend in retirement, then choosing investments that will deliver that income. Why is this strategy a better one than the famous rule of withdrawing 4% of your portfolio?

There’s really nothing wrong with the 4% rule. But given the lower expected portfolio returns ahead, starting out with a 3.5% withdrawal, or even 3.0%, might be more appropriate.

It also makes a big difference whether you start out withdrawing 4% of your nest egg and increasing that amount by inflation annually, or withdrawing 4% of whatever you’ve got in your portfolio each year. The 4%-of-current-portfolio-value strategy may mean lower income in some years. But it is a lot safer than automatically increasing the initial withdrawal amount with inflation.

I also think that it makes sense to divide your portfolio into two separate buckets. The first one should be designed to safely meet your living expenses, above and beyond your Social Security and pension checks. In the second portfolio you can take investing risk in stocks. This approach is certainly a more psychologically sound way of doing things. Investing is first and foremost a game of psychology and discipline. If you lose that game, you’re toast.

Q. What are the best investments for a safe portfolio?

There are two ways to do it: a TIPS (Treasury Inflation-Protected Securities) bond ladder or by buying an inflation-adjusted immediate annuity. Neither is perfect. You might outlive your TIPS ladder, and/or your insurer could go bankrupt. But they are among the most reliable sources of income right now.

One other income source to consider: Social Security. Unless both you and your spouse have a low life expectancy, the best version of an inflation-adjusted annuity out there is bought by spending down your nest egg before age 70 so you can defer Social Security until then. That way, you, or your spouse, will receive the maximum benefit.

Q. Fixed-income returns are hard to live on these days.

Yes, the yields on both TIPS and annuities are low. The good news is that those yields are the result of central bank policy, and that policy has caused the value of a balanced portfolio of stocks and bonds to grow larger than it would have in a normal economic cycle—so you have more money to buy those annuities and TIPS. That said, there’s nothing wrong with delaying those purchases for now and sticking with short-term bonds or intermediate bonds.

Q. How much do people need to save to ensure success?

Your target should be to save 25 years of residual living expenses, which is the amount that isn’t covered by Social Security and a pension, if you get one. Say you need $70,000 to live on, and your Social Security and pension amount to $30,000. You’ll have to come up with $40,000 to pay your remaining expenses. To produce that income, you’ll need a safe portfolio of $1 million, assuming a 4% withdrawal rate.

Q. Given today’s high market valuations, should older investors move money out of stocks now for safety? How about Millennial or Gen X investors?

Younger investors should hold the largest stock allocations, since they have time to recover from market downturns—and a bear market would give them the opportunity to buy at bargain prices. Millennials should try to save 15% of their income, as I recommend in my book, “If You Can.”

But if you’re in or near retirement, it all depends on how close you are to having the right-sized safe portfolio and how much stock you hold. If you don’t have enough in safe assets, then your stock allocation should be well below 50% of your portfolio. If you have more than that in stocks, bad market returns at the start of your retirement, combined with withdrawals, could wipe you out within a decade. If you have enough saved in safe assets, then everything else can be invested in stocks.

If you’re somewhere in between, it’s tricky. You need to make the transition between the aggressive portfolio of your early years and the conservative portfolio of your later years, when stocks are potentially toxic. You should start lightening up on stocks and building up your safe assets five to 10 years before retirement. And if you haven’t saved enough, think about working another couple of years—if you can.

MONEY Portfolios

Give Your Portfolio a Midyear Checkup

Zachary Zavislak; Prop Styling by Sarah Guido

A semi-annual examination of your holdings will make sure your investments are still on track. Before you kick back for the summer, review and adjust your portfolio for maximum performance.

Even if you’re feeling fine, you still visit the doctor now and then to make sure everything’s all right. Well, your portfolio deserves the same level of care. For instance, you may be pleased that the broad market is up again this year—continuing a bull run that has tripled your equity stake since 2009.

Yet investment success often brings with it a growing exposure to risk—perhaps too great to tolerate. See the chart below:

Portfolio moves
Here are three ways to review and adjust your investments to make sure they’re in tiptop shape:

Book losses now to capture an important tax break.

You don’t want to be a short-term investor, but you also don’t want to look a tax gift horse in the mouth.

Chances are, you’re sitting on hefty gains after the recent bull run. Want to take some profits off the table by selling winning shares of stocks, funds, or ETFs, but are reluctant to do so for fear of triggering a big capital gains bill? Book some losses now and Uncle Sam will let you offset those gains.

Normally, investors “harvest losses” at the end of the year. However, “you need to plan ahead” in case some of those losses evaporate, says Ann Arbor planner Rob Oliver.

Where to start? Emerging-market equity portfolios have fallen over the past three years, while Chinese region funds have lost more than 8% of their value so far in 2014. Other fertile ground: stock funds that specialize in gold and other precious metal–related investments (down 24% annually over the past three years), and shares of fast-growing small companies (down 7% year to date).

Tip: Don’t upset your portfolio just to take advantage of this break. While the IRS’s wash-sales rule bars you from buying the same or a “substantially identical” investment within 30 days of a sale, there’s nothing stopping you from selling an individual stock or an actively managed portfolio and replacing it with an index fund that covers the same asset. “If you sell a housing stock at a loss, you could buy a housing industry ETF,” says Pittsburgh adviser Jim Holtzman.

The market has changed your portfolio, so change it back.

“This is the first time in years that rebalancing has become really necessary,” says John Rekenthaler, director of research at Morningstar.

That’s because of the wide gap in performance between stocks and bonds lately. While equities posted double-digit annualized gains since 2009, fixed-income investments have returned just 4.8% a year.

Even if you rebalanced as recently as two years ago, you’ll want to at least revisit your mix. Why? Say you started off with a portfolio that was 70% in equities and 30% in bonds in May 2012. Because stocks have soared 45% since then while fixed income has been mostly flat, your portfolio is now 77% stocks and just 23% bonds.

Tip: Review your portfolio semiannually, but make adjustments only if your mix is substantially off—five percentage points or more above or below target. Rebalancing reduces portfolio risk, but there are times when it can also cut into returns. Use this strategy only when your exposure to certain assets grows uncomfortably high.

Make sure your life hasn’t changed either.

Unless you hold the bulk of your assets in a target-date retirement fund—which automatically shifts your mix for you, growing gradually more conservative over time—you’ll have to tweak your approach every now and then simply to reflect changes in your life.

For instance, as a 40-year-old you might have been comfortable holding 80% in equities, but at 50 you’re playing with greater sums and less time, so you might want to cap it at 60% to 65%.

Tip: To show how your asset mix should shift as your circumstances change, check out the free asset allocation calculator at Bankrate.com’s retirement section. Also, when you execute these changes, start in your 401(k)s and IRAs, where you won’t trigger capital gains taxes by selling. Why generate a tax bill when you don’t have to?

MONEY 401(k)s

Working for a Small Business? Your 401(k) Is Probably Small, Too.

At Mom-and-Pop companies, workers may miss out on perks like employer matches. Here's what to do.

You might call it retirement inequality. Over the past couple of decades, 401(k)s have become our national retirement plan, but you are most likely to be offered one if you work for a large- and mid-sized company. Only 24% of small businesses offer a 401(k).

If you’re working at small business that provides a 401(k), congrats—you can make headway in retirement saving. Many small business 401(k)s are doing a decent job, a new Vanguard survey found. The survey covered 1,418 of the fund group’s small business 401(k)s, those with up to $20 million in assets. The average plan had 44 participants and held $2.4 million.

But your savings are likely to lag your counterparts at larger employers. Compared with overall 401(k) balances, small plan accounts are just half the size—an average $55,657 in 2013 vs. $101,650 for 401(k)s overall. Still, small balances rose 10% gain over $50,610 in 2012. Median balances, which better reflect the typical employee, averaged just $11,171, up just 2% from $10,950 in 2012.

One reason for the difference: Small businesses tend to offer lower salaries than large companies, and many have higher turnover, so workers have less time to save. Company matches may also be less generous. Three out of four small businesses offer an employer contribution, compared with 91% of 401(k)s overall, according to Vanguard. Some 44% provided a matching contribution, 10% offered both a match and non-matching contribution, and 21% gave out a non-matching contribution only.

In other ways, small business plans are keeping up with larger 401(k)s. Participation averaged 73%, similar to overall levels. The savings rates were lowest for employees younger than 25—only 46% contributed in 2013. And just 47% of those earning less than $30,000 saved in their plans. For those who did join, the typical savings rate was 7.1% of pay, nearly identical to the overall savings rate.

Mirroring larger plans, the most popular investment was a target-date fund, which gives you an all-in-one asset mix that shifts to become more conservative as you near retirement. Two-third of small business workers had all or part of their portfolio in a target date fund, while 46% held one as their only investment. Another 6% opted for a balanced fund or other model portfolio.

The one 401(k) feature not explored in Vanguard’s small business survey: costs. Of course, Vanguard is famous for its inexpensive fund and ETF offerings. But outside of Vanguard’s orbit, many 401(k)s are saddled with with high fees—and that’s especially true for small plans, which lack economies of scale.

If you’re investing in a small business 401(k) plan, save at least enough to get a full match, if one is offered. And choose low-cost, broad index funds, if they’re available. If your plan charges a lot—more than 1.25%—put any additional money in a Traditional or Roth IRA. Aim to save as much as 15% of pay, both inside and outside your plan. That way, your nest egg will grow bigger, even if the business remains small.

 

MONEY 401(k)s

Should I Rollover My 401(k) Into An IRA?

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Robert A. Di Ieso, Jr.

Q: I left my job, and I’m looking for a new one. Am I better off rolling over my old 401(k) to a new employer’s 401(k) or to an IRA? I am being sold hard on the latter option by the firm in charge of our life insurance. — Dawn Deschamp, Lakewood, CO

A: You’re probably better off rolling into an IRA. But steer clear of investments pitched by your employer’s insurance company.

First, a quick recap of your options. When you leave your job, you can keep your 401(k) at your old employer, as long as the balance is $5,000 or more. (If your balance is smaller, employers are allowed to return the money to you.)

You can also roll over your balance into an IRA, which is often the best choice (and it’s what you should do if you have a small-balance account that is being returned to you). “With an IRA, you will have a wide array of choices, and you can often choose funds that charge lower fees than a 401(k),” says financial adviser Allan Roth of Wealth Logic in Colorado Springs.

Make sure you to set up your rollover as a trustee-to-trustee transfer, which moves your 401(k) balance directly to the IRA provider. Don’t let your employer write you a check, or 20% of your balance will be withheld until tax time.

Another option, when you get a new job, is to move your 401(k) account into your new employer’s 401(k). (Not all plans permit this.) Doing so may make sense if the new plan offers good, low-cost investment options, since with a single portfolio, you can more easily track your asset mix and rebalance.

(Of course, the final option is to simply cash out your account, but that would be such as bad decision, we won’t go into it—except to point out that you would trigger taxes plus a 10% penalty for early withdrawal if you’re under age 59 1/2.)

The best way to choose among these options is to compare the investments you want to own and the fees you would pay. At brokerages, such as Schwab and Fidelity, you can invest in low-cost ETFs and index funds, often with expense ratios of 0.10% or less. Some large-company 401(k) plans, with their negotiating power, can match those low fees, but many cannot. If your 401(k) charges more than, say, 0.8% for a stock fund, you probably should look elsewhere.

High fees are a key reason to avoid investing your IRA with your former employer’s insurance company. Funds offered by insurers often charge sales loads or carry high expenses. And insurance products, such as variable annuities, are typically complicated and costly. “Insurance and investing are best kept separate,” says Roth.

 

MONEY 401(k)s

Vanguard Study Finds (Mostly) Good News: 401(k) Balances Hit Record Highs

Stock market gains boosted wealth for those putting away money regularly in the right funds. Are you one of them?

If you’ve been stashing away money in a 401(k) retirement plan, you probably feel a bit richer right now.

The average 401(k) balance climbed 18% in 2013 to $101,650, a new record, according to a report by Vanguard, which is scheduled to be released tomorrow. That’s an increase of 80% over the past five years.

The median 401(k) balance — which may better reflect the typical worker — is far lower, just $31,396. (Looking at the median, the middle value in a group of numbers, minimizes the statistical impact of a few high-income, long-term savers who can skew the averages.) Still, median balances rose 13% last year, and over five years, they’re also up by 80%. All of which suggests that rank-and-file employees are building bigger nest eggs.

Vanguard balances
Source: Vanguard Group

That’s the good news. Now for the downside. Those rising 401(k) balances are mostly the result of the impressive gains that stocks have chalked up during the bull market, now in its sixth year. (The typical saver currently holds 71% in stocks vs. 66% in 2012.) Why is that a negative? Because at some point stocks will enter negative territory again, and all those 401(k) balances will suffer a setback.

Meanwhile, the amount that workers are actually contributing to their plans remains stuck at an average of 7% of pay, which is down slightly from the peak of 7.3% in 2007. And nearly one of four workers didn’t contribute at all, which has been a persistent trend.

Ironically, the savings decline is largely a side-effect of automatic enrollment, which puts workers in 401(k)s unless they specifically opt out. More than half of all 401(k) savers were brought in through auto-enrollment in 2013. These plans usually start workers at a low savings rates, often 3% or less. Unless the plan automatically increases their contributions over time—and many don’t—workers tend to stick with that initial savings rate.

Still, when you include the employer match—typically another 3% of pay—a total of 10% of compensation is going into the average worker’s plan, says Jean Young, senior research analyst at Vanguard. That’s not bad. But most people need to save even more—as much as 15% of pay to ensure a comfortable retirement, according to many financial advisers. (To see how much you should be putting away, try the retirement savings calculator at AARP.)

Even if 401(k) providers haven’t managed to get people to step up their savings rate, they are tackling the problem of investing right. More workers are being enrolled in, or opting for, target-date retirement funds, which give you an all-in-one asset allocation and gradually shift to become more conservative as you near retirement. Some 55% of Vanguard savers hold target-date funds—and for 30%, a target fund is their only investment.

With target-date funds, as well as managed accounts (which are run by investment advisers) and online tools, more 401(k) savers are also receiving financial guidance, which may improve their returns. As a recent study by Financial Engines and AonHewitt found, 401(k) savers who used their plan’s investing advice between 2006 and 2012 earned median annual returns that were three percentage points higher than those with do-it-yourself allocations.

Vanguard’s data found smaller differences. Still, over the five years ending in 2013, target-date funds led with median annual returns of 15.3% vs just 14% for do-it-yourselfers.

The lessons for investors: You’re better off choosing your own 401(k) savings rate, and try to put away more than 10% of pay. And if you aren’t ready to manage your own fund portfolio, opting for a target-date fund can be a wise move.

 

 

 

 

 

 

 

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