MONEY retirement planning

Answer These 10 Questions to See If You’re on Track to Retirement

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More Americans are confident about retirement—maybe too confident. Here's how to give your expectations a timely reality check.

The good news: The Employee Benefit Research Institute’s 2015 Retirement Confidence Survey says workers and retirees are more confident about affording retirement. The bad news: The survey also says there’s little sign they’re doing enough to achieve that goal. To see whether you’re taking the necessary steps for a secure retirement, answer the 10 questions below.

1. Have you set a savings target? No, I don’t mean a long-term goal like have a $1 million nest egg by age 65. I mean a short-term target like saving a specific dollar amount or percentage of your salary each year. You’ll be more likely to save if you have such a goal and you’ll have a better sense of whether you’re making progress toward a secure retirement. Saving 15% of salary—the figure cited in a recent Boston College Center for Retirement Research Study—is a good target. If you can’t manage that, start at 10% and increase your savings level by one percentage point a year, or go to the Will You Have Enough To Retire tool to see how you’ll fare with different rates.

2. Are you making the most of tax-advantaged savings plans? At the very least, you should be contributing enough to take full advantage of any matching funds your 401(k) or other workplace plan offers. If you’re maxing out your plan at work and have still more money you can save, you may also be able to save in other tax-advantaged plans, like a traditional IRA or Roth IRA. (Morningstar’s IRA calculator can tell you whether you’re eligible and, if so, how much you can contribute.) Able to sock away even more? Consider tax-efficient options like broad index funds, ETFs and tax-managed funds within taxable accounts.

3. Have you gauged your risk tolerance? You can’t set an effective retirement investing strategy unless you’ve done a gut check—that is, assessed your true risk tolerance. Otherwise, you run the risk of doing what what many investors do—investing too aggressively when the market’s doing well (and selling in a panic when it drops) and too conservatively after stock prices have plummeted (and missing the big gains when the market inevitably rebounds). You can get a good sense of your true appetite for risk within a few minutes by completing this Risk Tolerance Questionnaire-Asset Allocation tool.

4. Do you have the right stocks-bonds mix? Most investors focus their attention on picking specific investments—the top-performing fund or ETF, a high-flying stock, etc. Big mistake. The real driver of long-term investing success is your asset allocation, or how you divvy up your savings between stocks and bonds. Generally, the younger you are and the more risk you’re willing to handle, the more of your savings you want to devote to stocks. The older you are and the less willing you are to see your savings suffer setbacks during market downturns, the more of your savings you want to stash in bonds. The risk tolerance questionnaire mentioned above will suggest a stocks-bonds mix based on your appetite for risk and time horizon (how long you plan to keep your money invested). You can also get an idea of how you should be allocating your portfolio between stocks and bonds by checking out the Vanguard Target Retirement Fund for someone your age.

5. Do you have the right investments? You can easily get the impression you’re some sort of slacker if you’re not loading up your retirement portfolio with all manner of funds, ETFs and other investments that cover every obscure corner of the financial markets. Nonsense. Diversification is important, but you can go too far. You can “di-worse-ify” and end up with an expensive, unwieldy and unworkable smorgasbord of investments. A better strategy: focus on plain-vanilla index funds and ETFs that give you broad exposure to stocks and bonds at a low cost. That approach always makes sense, but it’s especially important to diversify broadly and hold costs down given the projections for lower-than-normal investment returns in the years ahead.

6. Have you assessed where you stand? Once you’ve answered the previous questions, it’s important that you establish a baseline—that is, see whether you’ll be on track toward a secure retirement if you continue along the saving and investing path you’ve set. Fortunately, it’s relatively easy to do this sort of evaluation. Just go to a retirement income calculator that uses Monte Carlo analysis to do its projections, enter such information as your age, salary, savings rate, how much you already have tucked away in retirement accounts, your stocks-bonds mix and the percentage of pre-retirement income you’ll need after you retire retirement (70% to 80% is a good starting estimate) and the calculator will estimate the probability that you’ll be able to retire given how much you’re saving and how you’re investing. If you’re already retired, the calculator will give you the probability that Social Security, your savings and any other resources will be able to generate the retirement income you’ll need. Ideally, you want a probability of 80% or higher. But if it comes in lower, you can make adjustments such as saving more, spending less, retiring later, etc. to improve your chances. And, in fact, you should go through this assessment every year or so just to see if you do need to tweak your planning.

7. Have you done any “lifestyle planning”? Finances are important, but planning for retirement isn’t just about the bucks. You also want to take time to think seriously about how you’ll actually live in retirement. Among the questions: Will you stay in your current home, downsize or perhaps even relocate to an area with lower living costs? Do you have enough activities—hobbies, volunteering, perhaps a part-time job—to keep you busy and engaged once you no longer have the nine-to-five routine to provide a framework for most days? Do you have plenty of friends, relatives and former co-workers you can turn to for companionship and support. Research shows that people who have a solid social network tend to be happier in retirement (the same, by the way, is true for retirees who have more frequent sex). Obviously, this is an area where your personal preferences are paramount. But seminars for pre-retirees like the Paths To Creative Retirement workshops at the University of North Carolina at Asheville and tools like Ready-2-Retire can help you better focus on lifestyle issues so can ultimately integrate them into your financial planning.

8. Have you checked out your Social Security options? Although many retirees may not think of it that way, the inflation-adjusted lifetime payments Social Security provides are one of their biggest financial assets, if not the biggest. Which is why it’s crucial that a good five to 10 years before you retire, you seriously consider when to claim Social Security and, if you’re married, how best to coordinate benefits with your spouse. Advance planning can make a big difference. For each year you delay taking benefits between age 62 and 70, you can boost your monthly payment by roughly 7% to 8%. And by taking advantage of different claiming strategies, married couples may be able to increase their lifetime benefit by several hundred thousand dollars. You’ll find more tips on how to get the most out of Social Security in Boston University economist and Social Security expert Larry Kotlikoff’s new Social Security Q&A column on RealDealRetirement.com.

9. Do you have a Plan B? Sometimes even the best planning can go awry. Indeed, two-thirds of Americans said their retirement planning has been disrupted by such things as major health bills, spates of unemployment, business setbacks or divorce, according to a a recent TD Ameritrade survey. Which is why it’s crucial that you consider what might go wrong ahead of time, and come up with ways to respond so you can mitigate the damage and recover from setbacks more quickly. Along the same lines, it’s also a good idea to periodically crash-test your retirement plan. Knowing how your nest egg might fare during a severe market downturn and what that mean for your retirement prospects can help prevent you from freaking out during periods of financial stress and better formulate a way to get back on track.

10. Do You Need Help? If you’re comfortable flying solo with your retirement planning, that’s great. But if you think you could do with some assistance—whether on an ongoing basis or with a specific issue—then it makes sense to seek guidance. The key, though, is finding an adviser who’s competent, honest and willing to provide that advice at a reasonable price. The Department of Labor recently released a proposal designed to better protect investors from advisers’ conflicts of interest. We’ll have to see how that works out. In the meantime, though, you can increase your chances of getting good affordable advice by following these four tips and asking these five questions.

Walter Updegrave is the editor of RealDealRetirement.com. If you have a question on retirement or investing that you would like Walter to answer online, send it to him at walter@realdealretirement.com.

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MONEY 401(k)s

401(k) Savings Hit a Record High. How Do You Stack Up?

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Workers are socking away more for retirement in their 401(k)s, a Fidelity report finds. But it may not be enough.

Some good news on the retirement front: The average 401(k) account balance reached a record high and workers are stashing away more in their plans, according to Fidelity, the largest retirement savings plan provider.

The average 401(k) held $91,800 in the first quarter of this year, up 3.6% from a year ago. Meanwhile, a record 23% of employees in Fidelity plans hiked their 401(k) contributions in the past year. The average savings rate, including both employer and employee contributions, climbed to 12.5%.

For employees in a 401(k) plan for 10 or more years, the average balance was a hefty $251,600, up 12% year over year. For those with both a 401(k) and IRA at Fidelity, the average combined balance rose 2.2% to $267,200.

Impressive, but it may not be enough. The Fidelity report doesn’t spell it out, but most of these gains are owed to the bull market, which will eventually fade. Meanwhile, the typical employee is still far behind in retirement saving.

That may seem counter-intuitive, given those lofty balances, but the averages are skewed upwards by high-income savers. The typical working household nearing retirement with a 401(k) and an IRA has a median $111,000 combined, which would yield less than $400 a month in retirement, according to a recent report by the Boston College’s Center for Retirement Research.

For households ages 55 to 64 earning $40,000 to $60,000 a year, the median balance in 401(k) and IRA accounts is just $53,000. For the same age group earning $138,000 or more, the median account is $452,000, according to CRR.

Financial planners recommend saving 10% to 15% of your income annually, starting in your 20s. The goal: amass 10 to 12 times your final annual earnings in order to have enough to maintain your standard of living in retirement. So if you make $60,000 a year, you should accumulate $600,000 to $720,000 by the time you retire.

That’s a tall order, and you could certainly live on less—many people do. Still, to have a shot at affording a decent retirement, you need to save consistently over the long term. And to do that, you need a plan, which gives a huge advantage to workers who have a 401(k).

According to the Employee Benefit Research Institute’s latest Retirement Confidence survey, those with 401(k) plans are much more optimistic about their retirement prospects: 71% of those with a plan are very or somewhat confident they will live comfortably in retirement, vs. just 33% of those who are not, EBRI found. Similarly, the CRR report shows that 68% of older households with the highest median retirement account balances had a 401(k) vs. just 22% for the group with the least savings.

Employers could be doing more to encourage that kind of savings behavior. Just one-third of 401(k) plans automatically enroll new workers but only 13% of companies automatically increase contribution rates each year, according to Fidelity.

To see if you’re on track, run your numbers on an online retirement savings calculator, such as those offered by T. Rowe Price or Vanguard. Get MONEY’s advice on how to make the most of your 401(k) at every stage of your life here. If you don’t have a 401(k), here’s what you need to know about IRAs.

Get more tips on investing for retirement:
What Is the Right Mix of Stocks and Bonds for Me?
How Many Funds Do I Need?
How Often Should I Check on My Retirement Investments?

MONEY Ask the Expert

Can I Put My Required Minimum Distribution into a Roth IRA?

Ask the Expert Retirement illustration
Robert A. Di Ieso, Jr.

Q: Can I convert the required minimum distribution from my regular IRA into a new Roth IRA account after paying the income taxes if I am not working? I want to have access to the money in case an emergency comes up. — Richard D’Arezzo, Acworth, GA

A: Sorry, no. According to IRS publication 590-A, the annual required minimum distribution (RMD) from your traditional IRA cannot be converted to a Roth IRA, says Tom Mingone, a financial planner at Capital Management Group of New York. But you do have options that can minimize taxes yet provide access to your money for emergencies.

Before we get to these alternatives, here’s a quick review of RMDs. These distributions are required under IRS rules starting at age 70 ½—after all, you’ve been deferring the taxes that are owed on contributions to your IRAs, and the bill has to come due sometime. If you don’t take the distribution, you’ll pay a 50% tax penalty in addition to the regular income tax on the amount you are required to withdraw.

IRS rules prohibit putting your RMD into another tax-advantaged retirement account. But you can convert the remaining portion of your traditional IRA assets to a Roth IRA, though it will mean paying more taxes. “You just have to satisfy the RMD requirement before you do a Roth conversion,” says Mingone. (If you aren’t working and receiving earned income, you can’t make a contribution to a Roth but once the money is in a traditional IRA, you don’t need to have additional earned income to move the money to a Roth IRA.)

If you make a mistake and roll over or convert your RMD, it will be treated as an excess contribution, and you’ll pay a penalty of 6% per year for each year it remains in the Roth or traditional IRA. You have until October 15 of the year after the excess contribution to correct it.

Is it a smart move to convert a traditional IRA to a Roth? That depends on your goals and your finances, says Mingone. Putting money into a Roth gives you a lot more flexibility because you’ll no longer be subject to the RMD rule—you can choose when and how much you take out. And unlike traditional IRA withdrawals, money pulled from a Roth won’t trigger taxes.

Still, there’s a downside to the conversion: that tax bill on the amount you convert. Depending on the size of the bill and the years you have to invest, the benefit may be small. In any case, consider this move only if you can pay the taxes with money outside your IRA, says Mingone. (To get an idea of the taxes you would owe, try this Vanguard calculator.)

The case for a Roth is generally strongest for younger people who have more time for the money to grow tax-free. Still, even at 70 ½, you could have many years of growth. And if you want to leave money to heirs, a Roth offers the greatest flexibility.

But if you need access to the money for emergencies, a new Roth may prove costly. You can take the principle out, but any earnings on the amount you deposit will be taxed if you withdraw it in the first five years.

If you don’t want to tie your money up in a Roth, you could just invest in a taxable account. Look for tax-efficient options such as index mutual funds. And consider putting some of your RMD in municipal bonds, which are free from federal income tax and often state and local taxes too, Mingone says. Tax-exempt bonds have been a tear recently, which suggests that risks are rising. Still, if you’re willing to hold on through market dips, munis may provide higher after-tax yields than taxable bonds.

Do you have a personal finance question for our experts? Write to AskTheExpert@moneymail.com.

Read next: Why Roth IRA Tax Tricks Won’t Rescue Your Retirement

MONEY IRAs

Why Roth IRA Tax Tricks Won’t Rescue Your Retirement

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George Karger—Getty Images/Time & Life Picture Collection

It's a myth that a Roth IRA is a sure way to add wealth. Saving more will make a bigger difference.

Roth IRAs are in fashion. Many people seem to believe that the Roth’s tax-free nature somehow generates more wealth in the end than other retirement savings options. But Roth IRAs have no magical capabilities.

A simple example of putting $5,000 to work in two types of IRAs—Roth and Traditional—shows there is no difference in the ending values of the two accounts, assuming your tax rate is unchanged between the initial contribution and withdrawal.

If your tax rate does change, the story is different. If your rate goes down, a Traditional IRA does better. And if your rate goes up, then the Roth does better. So neither IRA is a slam-dunk for tax savings: It all depends on whether your tax rate changes, and in which direction.

RMDs May Be No Big Deal

Roths are also touted for their ability to sidestep required minimum distributions. RMDs are the government’s way of making sure you pay taxes on Traditional IRAs. They are calculated as your IRA account balance divided by a “distribution period” corresponding to your life expectancy. You must begin RMDs at age 70 1/2, and include those withdrawals as part of your taxable income.

RMDs can be a nuisance to those with significant savings, and the dwindling few who receive pensions, because they can generate unnecessary taxable income. That is money you don’t need for living expenses, which will be taxed anyway. Even worse, in some scenarios, RMDs plus Social Security can force you into a higher tax bracket.

But RMDs may be a moot point. Many of today’s retirees are tapping their portfolios well before 70½ or relying on Social Security. And for many pre-retirees, the problem won’t be having to take out more than they need—it’s not having enough retirement savings in the first place! The government’s RMD rules won’t force much, if any, “extra” income on them.

Because of the threat of RMDs pushing you into a higher tax bracket, the conventional advice is that you should “top-off” your tax bracket in low-income years of early retirement by doing a Roth Conversion. That means transferring money from your Traditional IRA to a Roth, and paying income tax on the converted amount. You would be choosing to pay taxes now, in hopes that will save you on higher taxes in the future.

Consider the Margin for Error

But conventional rules of thumb can be inaccurate. You have to run your own numbers and, even then, the accuracy of the answers will be limited by your ability to predict your income far into the future. RMDs and Roth conversions lead to some very complex financial scenarios.

Analyzing my own situation using the best retirement calculators shows only modest levels of RMDs into our 90s, with our current 10% to 15% tax bracket unchanged. In theory, I could generate about 2% to 3% more wealth in the end if I did Roth conversions, as long as I paid the conversion tax from non-IRA assets. If I paid the tax from IRA funds, there would be no value in doing a conversion.

However, that 2% to 3% gain is well within the margin of error for retirement calculations. Who knows if I would ever see it? But, in doing Roth conversions, I would see additional complexity and paperwork in my financial life starting right now. Given that, I’m foregoing Roth conversions for the time being.

Roth conversions are unlikely to save you from high taxation of retirement assets. That’s because the total amount you can convert is limited by the number of years you spend in a lower tax bracket and your “headroom” to the next higher bracket.

Still, there are scenarios where Roths can save you money, particularly for those in higher tax brackets. And Roths can be useful to tax diversify your savings. To clarify the issues in your situation, use one or more of my recommended high-fidelity retirement calculators to run your own numbers.

And before you invest too much time in Roth tax tricks, make sure your overall retirement savings rate is on track: that will have a much bigger impact on your long-term financial success!

Darrow Kirkpatrick is a software engineer and author who lived frugally, invested successfully, and retired in 2011 at age 50. He writes regularly about saving, investing and retiring on his blog CanIRetireYet.com.

Read next: Which Wins for Retirement Savings: Roth IRA or Roth 401(k)?

MONEY retirement planning

How to Make Sure Your Retirement Adviser Is On Your Team

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Claire Benoist

A new rule would require financial advisers to act solely in their clients' best interest when giving retirement advice. Until that happens, here's how you can protect yourself.

In a move aimed at improving consumer protection for investors, the U.S. Labor Department today proposed a rule that would reduce conflicts of interest for brokers who advise on retirement accounts.

The proposed rule would require brokers to act solely in their clients’ best interests when giving advice or selling products related to retirement plans, including 401(k)s or IRAs.

Conflicted advice has been a longstanding problem for anyone nearing retirement—a parade of financial advisers will line up to help you roll over your 401(k) into an individual retirement account. And all too often, the guidance you get may improve your adviser’s returns more than yours.

A report issued in February by the Council of Economic Advisers found that conflicted financial advice costs retirement investors an estimated $17 billion a year. That’s why President Obama announced his support for the proposal back in February.

The new rule would require brokers to follow what is known as a fiduciary standard, which already applies to registered investment advisers. In contrast to RIAs, stockbrokers—who may go by “wealth manager” or some other title—follow a less stringent “suitability” standard, which lets them sell investments that are appropriate for you but may not be the best choice.

Many brokers do well by their customers, but some don’t. “A broker might recommend a high-cost, actively managed fund that pays him higher commissions, when a comparable lower-cost fund would be better for the investor,” says Barbara Roper, director of investor protection for the Consumer Federation of America.

During the next 75 days, the rule will be open to public comments. After that, the Labor Department is expected to hold a hearing and receive more comments. After that, the rule could be revised further. And it’s not clear when a final rule would go into effect—perhaps not before Obama leaves office.

An earlier Labor Department measure was derailed in 2011 by Wall Street lobbyists, who argued it would drive out advisers who work with small accounts. The new measure carves out exceptions for brokers who simply take orders for transactions. It also permits brokers to work with fiduciaries who understand the nature of their sales role.

Securities and Exchange Commission chairwoman Mary Jo White has also announced support for a fiduciary standard that would protect more individual investors beyond just those seeking help with retirement accounts. And the New York City Comptroller recently proposed a state law that would require brokers to tell clients that they are not fiduciaries.

Until those measures take effect—and even if they do—protect your retirement portfolio by following these guidelines:

Find out if you come first. Ask your adviser or prospective adviser if she is a fiduciary. A yes doesn’t guarantee ethical behavior, but it’s a good starting point, says Roper.

Then ask how the adviser will be paid. Many pros who don’t receive commissions charge a percentage of assets, typically 1%. Some advisers, however, are fiduciaries in certain situations but not all. So ask if the adviser is compensated in any other way for selling products or services. “You should understand what the total costs of the advice will be,” says Fred Reish, a benefits attorney with Drinker Biddle.

Many RIAs work with affluent clients—say, those investing at least $500,000—since larger portfolios generate larger fees. That’s one reason other investors end up with brokers, who are often paid by commission. Have a smaller portfolio? Find a planner who will charge by the hour at GarrettPlanning.com or findanadvisor.napfa.org (select “hourly financial planning services”). Your total cost might range from $500 for a basic plan to $2,500 or more for a comprehensive one.

Beware a troubled past. Any financial professional can say he puts his clients’ interests first, but his past actions might contradict that. To see whether a broker has run afoul of customers or regulators, inspect his record at brokercheck.finra.org. RIAs, who are regulated by the SEC and the states, must file a disclosure form called ADV Part 2, which details any disciplinary actions and conflicts of interest; you can look it up at adviserinfo.sec.gov.

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Favor a low-cost approach. A fiduciary outlook should be reflected in an adviser’s investment choices for you—and their expense. “Before making any recommendations, your adviser should first ask how your portfolio is currently invested,” says Mercer Bullard, a securities law professor at the University of Mississippi. Your 401(k) may have low fees and good investment options, so a rollover might be a bad idea.

If the adviser is quick to suggest costly, complex investments such as variable annuities, move on. “Most investors are best off in low-cost funds,” says Bullard. And with so much at stake, you want an adviser who’s more concerned with your costs than his profits.

Read Next: Even a “Fiduciary” Financial Adviser Can Rip You Off If You Don’t Know These 3 Things

MONEY Ask the Expert

Which Wins for Retirement Savings: Roth IRA or Roth 401(k)?

Ask the Expert Retirement illustration
Robert A. Di Ieso, Jr.

Q: I am 30 and just starting to save for retirement. My employer offers a traditional 401(k) and a Roth 401(k) but no company match. Should I open and max out a Roth IRA first and then contribute to my company 401(k) and hope it offers a match in the future?– Charlotte Mapes, Tampa

A: A company match is a nice to have, but it’s not the most important consideration when you’re deciding which account to choose for your retirement savings, says Samuel Rad, a certified financial planner at Searchlight Financial Advisors in Beverly Hills, Calif.

Contributing to a 401(k) almost always trumps an IRA because you can sock away a lot more money, says Rad. This is true whether you’re talking about a Roth IRA or a traditional IRA. In 2015 you can put $18,000 a year in your company 401(k) ($24,000 if you’re 50 or older). You can only put $5,500 in an IRA ($6,500 if you’re 50-plus). A 401(k) is also easy to fund because your contributions are automatically deducted from your pay check.

With Roth IRAs, higher earners may also face income limits to contributions. For singles, you can’t put money in a Roth if your modified adjusted gross income exceeds $131,000; for married couples filing jointly, the cutoff is $193,000. There are no income limits for contributions to a 401(k).

If you had a company match, you might save enough in the plan to receive the full match, and then stash additional money in a Roth IRA. But since you don’t, and you also have a Roth option in your 401(k), the key decision for you is whether to contribute to a traditional 401(k) or a Roth 401(k). (You’re fortunate to have the choice. Only 50% of employer defined contribution plans offer a Roth 401(k), according to Aon Hewitt.)

The basic difference between a traditional and a Roth 401(k) is when you pay the taxes. With a traditional 401(k), you make contributions with pre-tax dollars, so you get a tax break up front, which helps lower your current income tax bill. Your money—both contributions and earnings—will grow tax-deferred until you withdraw it, when you’ll pay whatever income tax rates applies at that time. If you tap that money before age 59 1/2, you’ll pay a 10% penalty in addition to taxes (with a few exceptions).

With a Roth 401(k), it’s the opposite. You make your contributions with after-tax dollars, so there’s no upfront tax deduction. And unlike a Roth IRA, there are no contribution limits based on your income. You can withdraw contributions and earnings tax-free at age 59½, as long as you’ve held the account for five years. That gives you a valuable stream of tax-free income when you’re retired.

So it all comes down to deciding when it’s better for you to pay the taxes—now or later. And that depends a lot on what you think your income tax rates will be when you retire.

No one has a crystal ball, but for young investors like you, the Roth looks particularly attractive. You’re likely to be in a lower tax bracket earlier in your career, so the up-front tax break you’d receive from contributing to a traditional 401(k) isn’t as big it would be for a high earner. Plus, you’ll benefit from decades of tax-free compounding.

Of course, having a tax-free pool of money is also valuable for older investors and retirees, even those in a lower tax brackets. If you had to make a sudden large withdrawal, perhaps for a health emergency, you can tap those savings rather than a pre-tax account, which might push you into a higher tax bracket.

The good news is that you have the best of both worlds, says Rad. You can hedge your bets by contributing both to your traditional 401(k) and the Roth 401(k), though you are capped at $18,000 total. Do this, and you can lower your current taxable income and build a tax diversified retirement portfolio.

There is one downside to a Roth 401(k) vs. a Roth IRA: Just like a regular 401(k), a Roth 401(k) has a required minimum distribution (RMD) rule. You have to start withdrawing money at age 70 ½, even if you don’t need the income at that time. That means you may be forced to make withdrawals when the market is down. If you have money in a Roth IRA, there is no RMD, so you can keep your money invested as long as you want. So you may want to rollover your Roth 401(k) to a Roth IRA before you reach age 70 1/2.

Do you have a personal finance question for our experts? Write to AskTheExpert@moneymail.com.

Read next: The Pros and Cons of Hiring a Financial Adviser

MONEY 401(k)s

How to Build a $1 Million Retirement Plan

$100 bricks and mortar
Money (photo illustration)—Getty Images(2)

The number of savers with seven-figure workplace retirement plans has doubled over the past two years. Here's how you can become one of them.

The 401(k) was born in 1981 as an obscure IRS regulation that let workers set aside pretax money to supplement their pensions. More than three decades later, this workplace plan has become America’s No. 1 way to save. According to a 2013 Gallup survey, 65% of those earning $75,000 or more expect their 401(k)s, IRAs, and other savings to be a major source of income in retirement. Only 34% say the same for a pension.

Thirty-plus years is also roughly how long you’ll prep for retirement (assuming you don’t get serious until you’ve been on the job a few years). So we’re finally seeing how the first generation of savers with access to a 401(k) throughout their careers is making out. For an elite few, the answer is “very well.” The stock market’s recent winning streak has not only pushed the average 401(k) plan balance to a record high, but also boosted the ranks of a new breed of retirement investor: the 401(k) millionaire.

Seven-figure 401(k)s are still rare—less than 1% of today’s 52 million 401(k) savers have one, reports the Employee Benefit Research Institute (EBRI)—but growing fast. At Fidelity Investments, one of the largest 401(k) plan providers, the number of million-dollar-plus 401(k)s has more than doubled since 2012, topping 72,000 at the end of 2014. Schwab reports a similar trend. And those tallies don’t count the two-career couples whose combined 401(k)s are worth $1 million.

Workers with high salaries have a leg up, for sure. But not all members of the seven-figure club are in because they make big bucks. At Fidelity thousands earning less than $150,000 a year have passed the million-dollar mark. “You don’t have to make a million to save a million in your 401(k),” says Meghan Murphy, a director at Fidelity.

You do have to do all the little things right, from setting and sticking to a high savings rate to picking a suitable stock and bond allocation as you go along. To join this exclusive club, you need to study the masters: folks who have made it, as well as savers who are poised to do the same. What you’ll learn are these secrets for building a $1 million 401(k).

1) Play the Long Game

Fidelity’s crop of 401(k) millionaires have contributed an above-average 14% of their pay to a 401(k) over their careers, and they’ve been at it for a long time. Most are over 50, with the average age 60.

Those habits are crucial with a 401(k), and here’s why: Compounding—earning money on your reinvested earnings as well as on your original savings—is the “secret sauce” to make it to a million. “Compounding gives you a big boost toward the end that can carry you to the finish line,” says Catherine Golladay, head of Schwab’s 401(k) participant services. And with a 401(k), you pay no taxes on your investment income until you make withdrawals, putting even more money to work.

You can save $18,000 in a 401(k) in 2015; $24,000 if you’re 50 or older. While generous, those caps make playing catch-up tough to do in a plan alone. You need years of steady saving to build up the kind of balance that will get a big boost from compounding in the home stretch.

Here’s how to do it:

Make time your ally. Someone who earns $50,000 a year at age 30, gets 2% raises, and puts away 14% of pay on average will have $547,000 by age 55—a hefty sum that with continued contributions will double to $1.1 million by 65, assuming 6% annualized returns. Do the same starting at age 35, and you’ll reach $812,000 at 65.

Yet saving aggressively from the get-go is a tall order. You may need several years to get your savings rate up to the max. Stick with it. Increase your contribution rate with every raise. And picking up part-time or freelance work and earmarking the money for retirement can push you over the top.

Milk your employer. For Fidelity 401(k) millionaires, employer matches accounted for a third of total plan contributions. You should squirrel away as much of the boss’s cash as you can.

According to HR association WorldatWork, at a third of companies 50% of workers don’t contribute enough to the company 401(k) plans to get the full match. That’s a missed opportunity to collect free money. A full 80% of 401(k) plans offer a match, most commonly 50¢ for each $1 you contribute, up to 6% of your salary, but dollar-for-dollar matches are a close second.

Broaden your horizons. As the graphic below shows, power-saving in your forties or fifties may bump you up against your 401(k)’s annual limits. “If you get a late start, in order to hit the $1 million mark, you will need to contribute extra savings into a brokerage account,” says Dirk Quayle, president of NextCapital, which provides portfolio-management software to 401(k) plans.

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Money

2) Act Like a Company Lifer

The Fidelity 401(k) millionaires have spent an average of 34 years with the same employer. That kind of staying power is nearly unheard-of these days. The average job tenure with the same employer is five years, according to the Bureau of Labor Statistics. Only half of workers over age 55 have logged 10 or more years with the same company. But even if you can’t spend your career at one place—and job switching is often the best way to boost your pay—you can mimic the ways steady employment builds up your retirement plan.

Here’s how to do it:

Consider your 401(k) untouchable. A fifth of 401(k) savers borrowed against their plan in 2013, according to EBRI. It’s tempting to tap your 401(k) for a big-ticket expense, such as buying a home. Trouble is, you may shortchange your future. According to a Fidelity survey, five years after taking a loan, 40% of 401(k) borrowers were saving less; 15% had stopped altogether. “There are no do-overs in retirement,” says Donna Nadler, a certified financial planner at Capital Management Group in New York.

Even worse is cashing out your 401(k) when you leave your job; that triggers income taxes as well as a 10% penalty if you’re under age 59½. A survey by benefits consultant Aon Hewitt found that 42% of workers who left their jobs in 2011 took their 401(k) in cash. Young workers were even more likely to do so. As you can see in the graphic below, siphoning off a chunk of your savings shaves off years of growth. “If you pocket the money, it means starting your retirement saving all over again,” says Nadler.

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Money

Resist the urge to borrow and roll your old plan into your new 401(k) or an IRA when you switch jobs. Or let inertia work in your favor. As long as your 401(k) is worth $5,000 or more, you can leave it behind at your old plan.

Fill in the gaps. Another problem with switching jobs is that you may have to wait to get into the 401(k). Waiting periods have shrunk: Today two-thirds of plans allow you to enroll in a 401(k) on day one, up from 57% five years ago, according to the Plan Sponsor Council of America. Still, the rest make you cool your heels for three months to a year. Meanwhile, 40% of plans require you to be on the job six months or more before you get matching contributions.

When you face a gap, keep saving, either in a taxable account or in a traditional or Roth IRA (if you qualify). Also, keep in mind that more than 60% of plans don’t allow you to keep the company match until you’ve been on the job for a specific number of years, typically three to five. If you’re close to vesting, sticking around can add thousands to your retirement savings.

Put a price on your benefits. A generous 401(k) match and friendly vesting can be a lucrative part of your compensation. The match added about $4,600 a year to Fidelity’s 401(k) millionaire accounts. All else being equal, seek out a generous retirement plan when you’re looking for a new job. In the absence of one, negotiate higher pay to make up for the missing match. If you face a long waiting period, ask for a signing bonus.

3) Keep Faith in Stocks

Research into millionaires by the Spectrem Group finds a greater willingness to take reasonable risks in stocks. True to form, Fidelity’s supersavers have 75% of their assets in stocks on average, vs. 66% for the typical 401(k) saver. That hefty equity stake has helped 401(k) millionaires hit seven figures, especially during the bull market that began in 2009.

What’s right for you will depend in part on your risk tolerance and what else you own outside your 401(k) plan. What’s more, you may not get the recent bull market turbo-boost that today’s 401(k) millionaires enjoyed. With rising interest rates expected to weigh on financial markets, analysts are projecting single-digit stock gains over the next decade. Still, those returns should beat what you’ll get from bonds and cash. And that commitment to stocks is crucial for making it to the million-dollar mark.

MONEY IRAs

There’s Free Money for IRA Rollovers—Here’s How to Invest It

Should you take the money and run? Only if you choose the right low-cost funds.

Back in the day, you could walk into a bank to open a new account and walk out with a free toaster.

Today, you can get anywhere from $50 to $2,500 for rolling over a 401(k) into an Individual Retirement Account, or just by moving an IRA from another financial institution.

But since banks are not in the habit of giving away money, you need to ask: What is the catch?

IRA providers use cash incentives, which are cheaper than advertising or direct mail, to acquire new customers. The latest marketing twist comes from Fidelity Investments, which is offering an “IRA Match” program to new and existing customers who transfer a Roth, traditional or rollover IRA to the company. Rollovers from 401(k)s are not eligible.

Fidelity will match your contributions up to 10% for the first three years that the account is open, although you would have to roll over a whopping $500,000 or more to get that level of match.

For most people, the match will be much smaller. A rollover of $50,000, for example, would qualify for a 1.5% match in each of the next three years. That is worth $260 over three years if you max out your annual contributions at $5,500, or $290 if you are over age 50 and eligible to make additional $1,000 catch-up contributions.

Fidelity is pitching this as the way to encourage higher levels of retirement savings, the way many employers make matching contributions to workers’ 401(k) plans.

“When you look at what really works in the retirement space, you can see that the employer match is a major factor driving participation,” says Lauren Brouhard, Fidelity Investments’ senior vice president for retirement. “We wanted to take an element of what works in the workplace and bring it to the IRA.”

Similar deals abound. For example, Charles Schwab Corp frequently runs promotions offering up to $2,500 for opening a new account, including rollovers from 401(k)s. Ally Bank will pay a $100 bonus for rolling between $25,000 and $50,000, and more for larger rollovers. Just do a Web search for “IRA cash bonus” to see how pervasive the practice has become.

Should you take the money and run? Perhaps, but do not let the cash distract you from more fundamental considerations.

For starters, do not roll funds out of a workplace 401(k) plan into an IRA if it charges higher fees. You should also make sure that the new provider offers the type of retirement investments you are looking for.

If you are rolling over to a mutual fund or brokerage company, the cardinal rule is to make sure your new provider does not earn back the bonus by parking you in high-cost active mutual funds or managed portfolio services.

“It’s a free lunch, but not if you yield to the temptations,” says Mitch Tuchman, managing director of Rebalance IRA, a wealth management firm that offers low-cost IRA portfolio management. “You have to avoid falling prey to the sirens of active management.”

Instead, manage your portfolio yourself by creating a portfolio of inexpensive passive index funds or exchange traded funds, which are available through their providers’ brokerage services.

To illustrate, he suggested a portfolio of four Vanguard ETFs whose fees are each below 20 basis points: Total U.S. Stock Market, Total International stocks, Total Bond Market and Total International Bond.

You can view Tuchman’s sample portfolios here.

Read next: 5 Signs You Will Become a Millionaire

MONEY Savings

5 Signs You Will Become a Millionaire

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Martin Barraud—Getty Images

A million isn't what it used to be. But it's not bad, and here's how you get there.

A million bucks isn’t what it used to be. When your father, or maybe you, set that savings goal in 1980 it was like shooting for $3 million today. Still, millionaire status is nothing to sniff at—and new research suggests that a broad swath of millennials and Gen-Xers are on the right track.

The “emerging affluent” class, as defined in the latest Fidelity Millionaire Outlook study, has many of the same habits and traits as today’s millionaires and multimillionaires. You are in this class if you are 21 to 49 years of age with at least $100,000 of annual household income and $50,000 to $250,000 in investable assets. Fidelity found this group has five key points in common with today’s millionaires:

  • Lucrative career: The emerging affluent are largely pursuing careers in information technology, finance and accounting—much like many of today’s millionaires did years ago. They may be at a low level now, but they have time to climb the corporate ladder.
  • High income: The median household income of this emerging class is $125,000, more than double the median U.S. household income. That suggests they have more room to save now and are on track to earn and save even more.
  • Self-starters: Eight in 10 among the emerging affluent have built assets on their own, or added to those they inherited, which is also true of millionaires and multimillionaires.
  • Long-term focus: Three in four among the emerging affluent have a long-term approach to investments. Like the more established wealthy, this group stays with its investment regimen through all markets rather than try to time the market for short-term gains.
  • Appropriate aggressiveness: Similar to multimillionaires, the emerging affluent display a willingness to invest in riskier, high-growth assets for superior long-term returns.

Becoming a millionaire shouldn’t be difficult for millennials. All it takes is discipline and an early start. If you begin with $10,000 at age 25 and save $5,500 a year in an IRA that grows 6% a year, you will have $1 million at age 65. If you save in a 401(k) plan that matches half your contributions, you’ll amass nearly $1.5 million. That’s with no inheritance or other savings. Such sums may sound big to a young adult making little money. But if they save just $3,000 a year for seven years and then boost it to $7,500 a year, they will reach $1 million by age 65.

An emerging affluent who already has up to $250,000 and a big income can do this without breaking a sweat. They should be shooting far higher—to at least $3 million by 2050, just to keep pace with what $1 million buys today (assuming 3% annual inflation). But they will need $6 million in 2050 to have the purchasing power of $1 million back in 1980, when your father could rightly claim that a million dollars would make him rich.

Read next: What’s Your Best Path to $1 Million?

MONEY financial advisers

Proposed Retiree Safeguard Is Long Overdue

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Jan Stromme—Getty Images

The financial-advice regulations pushed by the Obama administration will save retirees, on average, an estimated $12,000.

When you are planning for retirement and ask for advice, whose interest should come first — yours or the financial expert you ask for help?

That is the question at the heart of a Washington debate over the unsexy-sounding term “fiduciary standard.” Simply put, it is a legal responsibility requiring an adviser to put the best interest of a client ahead of all else.

The issue has been kicking around Washington ever since the financial crisis, and it took a dramatic turn on Monday when President Barack Obama gave a very public embrace to an expanded set of fiduciary rules. In a speech at AARP, the president endorsed rules proposed by the Department of Labor that would require everyone giving retirement investment advice to adhere to a fiduciary standard.

The president’s decision to embrace and elevate fiduciary reform into a major policy move is huge.

“The White House knows that this is the most significant action it can take to promote retirement security without legislation,” said Cristina Martin Firvida, director of financial security and consumer affairs at AARP, which has been pushing for adoption of the new fiduciary rules.

Today, financial planning advice comes in two flavors. Registered investment advisors (RIAs) are required to meet a fiduciary standard. Most everyone else you would encounter in this sphere — stockbrokers, broker-dealer representatives and people who sell financial products for banks or insurance companies — adhere to a weaker standard where they are allowed to put themselves first.

“Most people don’t know the difference,” said Christopher Jones, chief investment officer of Financial Engines, a large RIA firm that provides fiduciary financial advice to workers in 401(k) plans.

The difference can be huge for your retirement outcome. A report issued this month by the President’s Council of Economic Advisers found that retirement savers receiving conflicted advice earn about 1 percentage point less in returns, with an aggregate loss of $17 billion annually.

The report pays special attention to the huge market of rollovers from workplace 401(k)s to individual retirement accounts — transfers which often occur when workers retire. Nine of 10 new IRAs are rollovers, according to the Investment Company Institute mutual fund trade group. The CEA report estimates that $300 billion is rolled over annually, and the figures are accelerating along with baby-boom-generation retirements.

The CEA report estimates a worker receiving conflicted advice would lose about 12% of the account’s value over a 30-year period of drawdowns. Since the average IRA rollover for near-retirees is just over $100,000, that translates into a $12,000 loss.

What constitutes conflicted advice? Plan sponsors — employers — have a fiduciary responsibility to act in participants’ best interest. But many small 401(k) plans hire plan recordkeepers and advisers who are not fiduciaries. They are free to pitch expensive mutual funds and annuity products, and industry data consistently shows that small plans have higher cost and lower rates of return than big, well-managed plans.

The rollover market also is rife with abuse, often starting with the advice to roll over in the first place. Participants in well-constructed, low-fee 401(k)s most often would do better leaving their money where it is at retirement; IRA expenses run 0.25 to 0.30 percentage points higher than 401(k)s, according to the U.S. Government Accountability Office. Yet the big mutual fund companies blitz savers with cash come-ons, and, as I wrote recently, very few of their “advisers” ask customers the basic questions that would determine whether a rollover is in order.

The industry makes the Orwellian argument that a fiduciary standard will make it impossible for the industry to offer cost-effective assistance to the middle class. But that argument ignores the innovations in technology and business practices that already are shaking up the industry with low-cost advice options.

How effective will the new rules be? The devil will be in the details. Any changes are still a little far off: TheDepartment of Labor is expected to publish the new rules in a few months — a timetable that already is under attack by industry opponents as lacking a duly deliberative process.

Enough, already. This debate has been kicking around since the financial crisis, and an expanded fiduciary is long overdue.

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