In its annual Retirement Confidence Survey of current workers and retirees, the Employee Benefit Research Institute found that workers’ confidence in their ability to fund retirement fell by the largest extent since the financial crisis of 2008, to levels not seen since 2018. Retirees’ confidence also took a substantial hit. Overall, just 20% of respondents … Read more
Yes, there are good things about being old, such as increased happiness, less stress, better marriages and deeper friendships. You seldom hear that: People tend to focus on the negatives of aging. How old is “old?” I don’t know exactly, but after my recent birthday I can say that it’s much older than 58. My … Read more
The Health of Social Security: Some Good News and Some Bad News With approximately 94% of American workers covered by Social Security and 65 million people currently receiving benefits, keeping Social Security healthy is a major concern.1 Social Security isn’t in danger of going broke — it’s financed primarily through payroll taxes — but its … Read more
In general, workers seem to begin preparing for retirement almost as soon as they get their first job. However, according to the 2021 Retirement Confidence Survey by the Employee Benefit Research Institute (EBRI), retirement preparations do vary a bit by age group. Let’s look at Ages 45-54 with our infographic “5 Facts About Planning for Retirement”
More women are working and taking charge of their own retirement planning than ever before. What does retirement mean to you? Do you dream of traveling? Pursuing a hobby? Volunteering your time, or starting a new career or business? Simply enjoying more time with your grandchildren? Whatever your goal, you’ll need a retirement income plan that’s designed to support the retirement lifestyle that you envision, and minimize the risk that you’ll outlive your savings.
Establishing a target age is important, because when you retire will significantly affect how much you need to save. For example, if you retire early at age 55 as opposed to waiting until age 67, you’ll shorten the time you have to accumulate funds by 12 years, and you’ll increase the number of years that you’ll be living off of your retirement savings. Also consider:
• The longer you delay retirement, the longer you can build up tax-deferred funds in your IRAs and employer-sponsored plans such as 401(k)s, or accrue benefits in a traditional pension plan if you’re lucky enough to be covered by one.
• Medicare generally doesn’t start until you’re 65. Does your employer provide post-retirement medical benefits? Are you eligible for the coverage if you retire early? Do you have health insurance coverage through your spouse’s employer? If not, you may have to look into COBRA or a private individual policy — which could be expensive.
• You can begin receiving your Social Security retirement benefit as early as age 62. However, your benefit may be 25% to 30% less than if you waited until full retirement age. Conversely, if you delay retirement past full retirement age, you may be able to increase your Social Security retirement benefit.
• If you work part-time during retirement, you’ll be earning money and relying less on your retirement savings, leaving more of your savings to potentially grow for the future (and you may also have access to affordable health care).
• If you’re married, and you and your spouse are both employed and nearing retirement age, think about staggering your retirements. If one spouse is earning significantly more than the other, then it usually makes sense for that spouse to continue to work in order to maximize current income and ease the financial transition into retirement.
We all hope to live to an old age, but a longer life means that you’ll have even more years of retirement to fund. The problem is particularly acute for women, who generally live longer than men. To guard against the risk of outliving your savings, you’ll need to estimate your life expectancy. You can use government statistics, life insurance tables, or life expectancy calculators to get a reasonable estimate of how long you’ll live. Experts base these estimates on your age, gender, race, health, lifestyle, occupation, and family history. But remember, these are just estimates. There’s no way to predict how long you’ll actually live, but with life expectancies on the rise, it’s probably best to assume you’ll live longer than you expect.
Once you know when your retirement will likely start, how long it may last, and the type of retirement lifestyle you want, it’s time to estimate the amount of money you’ll need to make it all happen. One of the biggest retirement planning mistakes you can make is to underestimate the amount you’ll need to save by the time you retire. It’s often repeated that you’ll need 70% to 80% of your pre-retirement income after you retire. However, the problem with this approach is that it doesn’t account for your specific situation. Focus on your actual expenses today and think about whether they’ll stay the same, increase, decrease, or even disappear by the time you retire. While some expenses may disappear, like a mortgage or costs for commuting to and from work, other expenses, such as health care and insurance, may increase as you age. If travel or hobby activities are going to be part of your retirement, be sure to factor in these costs as well. And don’t forget to take into account the potential impact of inflation and taxes.
Once you have an idea of your retirement income needs, your next step is to assess how prepared you (or you and your spouse) are to meet those needs. In other words, what sources of retirement income will be available to you? Your employer may offer a traditional pension that will pay you monthly benefits. In addition, you can likely count on Social Security to provide a portion of your retirement income. Other sources of retirement income may include a 401(k) or other retirement plan, IRAs, annuities, and other investments. The amount of income you receive from those sources will depend on the amount you invest, the rate of investment return, and other factors. Finally, if you plan to work during retirement, your earnings will be another source of income.
When you compare your projected expenses to your anticipated sources of retirement income, you may find that you won’t have enough income to meet your needs and goals. Closing this difference, or “gap,” is an important part of your retirement income plan. In general, if you face a shortfall, you’ll have five options: save more now, delay retirement or work during retirement, try to increase the earnings on your retirement assets, find new sources of retirement income, or plan to spend less during retirement.
A 65-year-old woman is expected to live another 20.8 years, compared with 19.6 years for a man. (Source: NCHS Data Brief, Number 395, December 2020) *Generally, annuity contracts have fees and expenses, limitations, exclusions, holding periods, termination provisions, and terms for keeping the annuity in force. Most annuities have surrender charges that are assessed if the contract owner surrenders the annuity
Even after that special day comes, you’ll still have work to do. You’ll need to carefully manage your assets so that your retirement savings will last as long as you need them to.
• Review your portfolio regularly. Traditional wisdom holds that retirees should value the safety of their principal above all else. For this reason, some people shift their investment portfolio to fixed income investments, such as bonds and money market accounts, as they enter retirement. The problem with this approach is that you’ll effectively lose purchasing power if the return on your investments doesn’t keep up with inflation. While it generally makes sense for your portfolio to become progressively more conservative as you grow older, it may be wise to consider maintaining at least a portion in growth investments.
• Spend wisely. You want to be careful not to spend too much too soon. This can be a great temptation, particularly early in retirement. A good guideline is to make sure your annual withdrawal rate isn’t greater than 4% to 6% of your portfolio. (The appropriate percentage for you will depend on a number of factors, including the length of your payout period and your portfolio’s asset allocation.) Remember that if you whittle away your principal too quickly, you may not be able to earn enough on the remaining principal to carry you through the later years.
• Understand your retirement plan distribution options. Most pension plans pay benefits in the form of an annuity. If you’re married, you generally must choose between a higher retirement benefit that ends when your spouse dies, or a smaller benefit that continues in whole or in part to the surviving spouse. A financial professional can help you with this difficult, but important, decision.
• Consider which assets to use first. For many retirees, the answer is simple in theory: withdraw money from taxable accounts first, then tax-deferred accounts, and lastly, tax-free accounts. By using your tax-favored accounts last and avoiding taxes as long as possible, you’ll keep more of your retirement dollars working for you. However, this approach isn’t right for everyone. And don’t forget to plan for required distributions. You must generally begin taking minimum distributions from employer retirement plans and traditional IRAs when you reach age 72, whether you need them or not. Plan to spend these dollars first in retirement.
• Consider purchasing an immediate annuity. Annuities are able to offer something unique — a guaranteed income stream for the rest of your life or for the combined lives of you and your spouse (although that guarantee is subject to the claims-paying ability and financial strength of the issuer). The obvious advantage in the context of retirement income planning is that you can use an annuity to lock in a predictable annual income stream, not subject to investment risk, that you can’t outlive.*
Unfortunately, there’s no one-size-fits-all when it comes to retirement income planning. A financial professional can review your circumstances, help you sort through your options, and help develop a plan that’s right for you.
Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2021
IMPORTANT DISCLOSURES The opinions expressed herein are those of Ballast Advisors, LLC and are subject to change without notice. The third-party material presented is derived from sources Ballast Advisors consider to be reliable, but the accuracy and completeness cannot be guaranteed. Past performance is not indicative of future results. Nothing contained herein is an offer to purchase or sell any product. This material is for informational purposes only and should not be considered investment advice. Ballast Advisors reserve the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, legal, or retirement advice or recommendations. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice. Ballast Advisors, LLC is a registered investment advisor under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about the firm, including its services, strategies, and fees can be found in our ADV Part 2, which is available without charge upon request.
When markets near high records, you wonder, “Is this a bubble?” When markets dive, you wonder, “Is this a crash?” Your biggest question: How do you keep your head on the recent Wall Street rollercoaster?
After one of the most spectacular recoveries in recent years (from the bottom in late March 2020 to present day) both the Dow Jones Industrial Average and the S&P 500 continue to notch record highs – enough whipsawing to make your neck and your retirement accounts ache.
There’s an effective medium, though, between doing nothing and panicky trading. These guidelines can keep you level-headed even while the markets twist and turn (which they always will).
Revisit or develop your investment policy statement at the beginning of every year. An IPS describes procedures, your investment philosophy and style, guidelines and constraints for you and your advisor to manage your investments.
An IPS serves as your guardrail so you don’t veer all over, chasing investments or changing your strategy as markets change.
To begin creating your IPS, write down your key investing goal and the year in which you hope to reach it. If this goal will take you years (such as funding your retirement or paying for a child’s college education), try to figure your own longevity – then add a few more years. Quantify how much your goal costs and remember to adjust the cost upward to reflect inflation’s likely future impact.
Next, set your asset allocation targets for investments. Your IPS needs to fix a range for your asset allocation rather than a static figure for each class. This increases your options for making investment decisions if the markets rise or dip just a little.
Finally, document specifically the market conditions that will spur you to make investment decisions. That way you’ll know what to do and exactly when – not just when your emotions move you.
These are diversified buckets of holdings that follow general market rises and falls. The odds of one or a few companies dropping to zero at the same time are slim. The odds of all the companies going to zero at the same time in an index are practically non-existent.
You may reduce your worries about losing your money – although index values still go up and down – as well as grow comfortable with changing values and learn how to rein in your exposure to those changes.
Investing in more than one index is also a basic part of protecting your portfolio with diversification and asset allocation (two different tactics).
Further, consider these three tips:
1. Forget about predicting the future. Correctly guessing one event is lucky. Nailing 10 events – that’s prediction. Nobody accomplishes that regarding the markets. Approach investing with no predictions: Being wrong can carry huge costs.
2. Develop a prudent plan. Include structured processes with decision rules to guide you and that already consider markets always going up and down. The degree of ups and downs you weather depends largely on your tolerance and capacity for risk.
3. Customize your portfolio. Base it on the principles above and tailor it to you and your situation. Don’t invest based on chit-chat around the (virtual) water cooler, structuring financial moves based on someone else’s situation and needs. To do so sends you chasing investments that are merely hot and not necessarily what’s prudent for you.
Combining and using these principles can provide you some comfort during any market.
Copyright © 2021 AIQ. All rights reserved. Distributed by Financial Media Exchange
If there was one word for 2020, it very well might be “uncertainty” — rarely a positive noun in the investment world. Global pandemic aside, a presidential election is traditionally a time for some uncertainty among investors to the degree they believe a president’s party or policies can shift the market.
However, data suggests that degree of influence an election result has on the market is not always so clear. There have been 17 presidential elections since 1950, and each comes with unique variables that may impact market performance. Collecting and organizing the data from these elections is made easier using YCharts, a leading research firm for financial advisors based in Chicago, IL. “YCharts allows Ballast Advisors to collect historical data, like election data, export it to an Excel spreadsheet for analysis and detecting trends, and present it in a way that is easy to digest for clients,” says Steve Schmidt, a partner at Ballast Advisors. Schmidt makes it clear that the data and graphs from YCharts are meant to provide context, not as investment advice. Past performance should never be used to indicate future results.
“We often hear from our clients during an election cycle,” says Schmidt. “They often have concerns about the impact of an election on their financial plans.” While every investor is different, Steve Schmidt and the professionals at Ballast Advisors have taken the time to answer three common questions heard from investors during this election
According to trends observed in the data from YCharts, when presidential candidates are “tied” in polling, the S&P 500 daily and cumulative returns are negative. On average, the trends in the YCharts data reveals the market tends to favor a Republican candidate leading the major polls.
“Keep in mind, leads in political polls often vary depending on the source of the poll,” said Schmidt, “polls are not an exact science, and may also have inherit bias depending on the targeted participants of the poll.”
S&P 500 Performance By Party Leading Polls 
Two strong examples of this pattern: S&P 500 percent change under poll leaders in the 1988 and 2000 U.S. Presidential elections. See disclosures below.
Although, historically the market may initially react favorably to a Republican candidate because of the belief that their policies are more “Business friendly” and therefore more stock-market favorable versus Democrat candidates. However, data demonstrates that once a president takes office, in the long run the market has performed better under Democratic presidents on average.
“Today’s economic conditions and thus, market performance, is often a cumulative effect that can be a decade in the making,” Schmidt says. “Today’s economy often stems from the work of both current and previous administrations combined.”
According to YChart data, U.S. and Emerging Market Equities have been among the best performing major asset classes since Bill Clinton’s 1993 inauguration. In the last 30 years under four different presidents, U.S. and International Equities handily outperformed under Democrats, and Emerging markets have slightly outperformed under the Republican presidents (Performance through Set 14, 2020 for Donald Trump).
“At the end of the day,” Schmidt reminds us, “markets fluctuate for a host of reasons, many of which are misunderstood by seasoned investors. The best laid investment plan is to stay diversified.”
What does this mean overall? If you’re basing your investment decisions on what party is or isn’t elected during presidential elections, you’re likely hurting your portfolio more than helping it. The person occupying the White House is just one of many variables that impact investment values. For example, the Dot.com burst in 2001, and the financial crisis in 2008 greatly impacted the markets beyond the control of Presidents Bush and President Obama.
“At Ballast Advisors, we recommend in the face of uncertainty clients ‘stay invested,’ because almost without exception we’ve accounted for money needed in the near-term,” Schmidt reminds us. Prominent investor Peter Lynch once said, “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” According the chart below, the S&P500 has consistently grown in value, no matter who is in office.
Rather than invest in stocks under only a Republican or Democratic president, stay invested in stocks for the long-term under all presidents.
Data & Disclaimers
The opinions expressed herein are those of Ballast Advisors, LLC and are subject to change without notice. The third-party material presented is derived from sources Ballast Advisors consider to be reliable, but the accuracy and completeness cannot be guaranteed. Ballast Advisors, LLC is a registered investment advisor under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. Past performance is no guarantee of future results. All investing involves some degree of risk. Nothing contained herein is an offer to buy or sell a security, investment strategy or product. More information about the firm, including its services, strategies, and fees can be found in our ADV Part 2, which is available without charge upon request.
Historical market performance for the S&P 500 and other asset classes accessed via https://go.ycharts.com/hubfs/Guide_to_How_Presidential_Elections_Impact_the_Stock_Market.pdf
Presidential term dates can be found https://en.wikipedia.org/wiki/List_of_presidents_of_the_United_States
Polling sources: 1952-2012 elections: Gallup; 2016-2020 elections: Marist College, Monmouth University, Siena College/The New York Times Upshot, ABC News/The Washington Post ( A+ rated pollsters FiveThirtyEight). How this polling data works: https://projects.fivethirtyeight.com/pollster-ratings/ How this polling data works: Pollster data sourced from FiveThirty Eight and is good through May 19, 2020. FiveThirtyEight’s pollster ratings are calculated by analyzing the historical accuracy of each firm’s polls along with its methodology. Accuracy scores are adjusted for the type of election polled, the poll’s sample size, the performance of other polls surveying the same race, and other factors. FiveThirtyEight also calculates measures of statistical bias in the polls.
Data was aggregated by YCharts with the end-date of each poll’s collection period serving as the charted poll date.
©2020 YCharts, Inc. All Rights Reserved. YCharts, Inc. (“YCharts”) is not registered with the U.S. Securities and Exchange Commission (or with the securities regulatory authority or body of any state or any other jurisdiction) as an investment adviser, broker-dealer or in any other capacity, and does not purport to provide investment advice or make investment recommendations. This report has been generated through application of the analytical tools and data provided through ycharts.com and is intended solely to assist you or your investment or other adviser(s) in conducting investment research. You should not construe this report as an offer to buy or sell, as a solicitation of an offer to buy or sell, or as a recommendation to buy, sell, hold or trade, any security or other financial instrument. For further information regarding your use of this report, please go to: ycharts.com/about/disclosure
The S&P 500 index is an unmanaged market-capitalization-weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent U.S. equity performance. The index is provided for comparative and informational purposes only. It is not possible to invest directly in the index shown.
It’s a new year, a new decade, and the perfect time to renew healthy habits, including those in your financial life. Like any good habit, setting intentions and priorities is important. At Ballast Advisors, we know that our clients who are intentional and diligent about their financial goals have more success.
You may have already set your big financial goals, like saving for retirement, planning for your child’s education or buying your dream home (And if you haven’t started that process, call us).
But here are some tips for smaller resolutions you can consider trying in 2020 to improve your discipline around your personal financial planning and retirement goals.
Okay, this is low hanging fruit, but consider setting a new and unique goal with your budget. “It’s easy for a client to say I want to save more money or trim expenses, but getting specific is key. Pick an expense or determine where you are going to save money,” says Scott Peterson, wealth advisor at Ballast Advisors.
If you’re someone who generally spends first then tries to save what they can at the end of each month you should consider paying yourself first. Set a simple savings goal for each paycheck and get that out of the way before paying any bills. “Maybe you start at $10 a paycheck, maybe it’s $500…everybody is different,“ suggests Richard Juckel, financial planner at Ballast Advisors. “A general rule of thumb is to try and save 15-20% of your pre-tax income. If you have a steep hill to climb to reach your savings goals, start small and work your way up.”
Are you making the most of your executive benefits package? At a minimum if your company offers a retirement savings plan with a match you could be leaving money on the table if you’re not contributing to the plan. Consider saving at least the amount your employer is willing to match. Saving the matching amount alone is rarely enough to meet most people’s retirement plans, but it’s a great place to start!
BONUS TIP: Save your raise. If you’re fortunate enough to receive a raise throughout the year, consider using the increased income to step up your savings plan. These incremental savings increases could really add up over time.
Set time aside to review anything that is on auto-payment. $5.99 here and $14.99 there add up quickly over time. Do you still need that music subscription or meditation app you forgot you subscribed to last year?
This is also a great time to evaluate your rates for things like insurance and other monthly services and fees. Are you getting the best rate?
There is a load of free content out there to help you improve your financial acumen. Commit to reading a finance blog weekly, or find a podcast. Make it a routine to listen to your podcast during your workout, or on your commute from work.
“On the Ballast Advisors website, we offer free financial tools, calculators and financial education,” says Paul Parnell, wealth advisor at Ballast Advisors. “Or if you’re not using a financial planner, consider a free consultation.”
The process of having a professional review your employer sponsored retirement plan in addition to other investments and savings, can help you determine if you are on track.
“A great oldie but really good book on paying for yourself first and saving is The Millionaire Next Door: The Surprising Secrets of America’s Wealthy by Thomas J. Stanley and William D. Danko,” Parnell adds.
Related Post: Financial Planner vs Financial Advisor? Making sense of these titles and other tips on choosing a financial professional
Maybe this is the year you try a new app. There are many great technology services to help you track your spending better. Consider an app like Mint, where you can track income and expenses. This article on Investopedia lists the top personal finance apps in 2019.
Or check with your financial planner. Ballast Advisors clients have a customized portal to review their portfolio online.
Schedule a monthly reminder in your phone to review your app or portal.
Again, it’s easy to say you want to save more money or trim expenses in 2020, but making intentional and specific steps is key.
For more information on how Ballast Advisors helps clients with personal financial planning, executive benefits, and saving for retirement, and see www.ballastadvisors.com/. Our financial advisors serving the Twin Cities and Southwestern Florida can help you reach your retirement and financial goals. Our offices are located in Woodbury, MN, Arden Hills, MN and Punta Gorda, FL.
IMPORTANT DISCLOSURES
The opinions expressed are those of Ballast Advisors, LLC. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. These opinions contain references to material provided by third-party sources believed to be reliable but cannot be guaranteed for accuracy.
Ballast Advisors, LLC is a registered investment advisor under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about the firm, including its services, strategies, and fees can be found in our ADV Part 2, which is available without charge upon request. The opinions expressed herein are those of Ballast Advisors, LLC and are subject to change without notice.
It’s a new year (thank goodness) and the perfect time to renew healthy habits, including those in your financial life. If 2020 taught us anything, it’s the importance of planning ahead. You may have already been working toward your big financial goals, like saving for retirement or planning for your child’s education. However, how you approach these goals may have had to change, depending on how the Pandemic impacted your individual financial plan.
As financial planners and advisors, we are passionate about helping you set intentions and priorities around personal finance goals. A general rule of thumb is to try and save 15-20% of your pre-tax income. We know that our clients who are intentional and diligent about their financial goals have more success.
Here are 10 money saving tips you can consider implementing in 2021 to improve your discipline around your personal financial planning and retirement goals.
Savings Tip #1 – Set a simple savings goal for each paycheck and get that out of the way before paying any bills. Set it to transfer automatically, so you get used to having less money to spend.
Savings Tip #2 – Evaluate your retirement plan. Once you set your budget, work toward taking that first 15% and invest in your 401K, IRA or retirement account. This habit will go a long way toward building your retirement savings.
Savings Tip #3 – If you’re lucky enough to still see a raise or bonus this year, consider using the increased income to step up your savings plan. These incremental savings increases could really add up over time.
Savings Tip #4 – If your company offers a retirement savings plan with a match, you could be leaving money on the table if you’re not contributing to the plan. Consider saving at least the amount your employer is willing to match. Saving the matching amount alone is rarely enough to meet most people’s retirement plans, but it’s a great place to start!
Savings Tip #5 – If you brown bag your lunch vs. eating out, you can save an average of $100 a month. If you invested that money into retirement you could have as much as $103,000 when you retire. (assuming 25 years to retirement, 2.5% inflation rate, and an average of 7% rate of return).
Savings Tip #6 – While you’re cleaning out those closets, consider selling stuff you haven’t used in a year and use the proceeds toward any credit card debt. Don’t forget to check your credit reports once a year for free at annualcreditreport.com.
Savings Tip #7 – Set time aside to review anything that is on auto-payment. $5.99 here and $14.99 there add up quickly over time. Do you still need that music subscription or meditation app you forgot you subscribed to last year?
Savings Tip #8 – This is also a great time to evaluate your rates for things like insurance and other monthly services and fees. Are you getting the best rate?
Savings Tip #9 – If you’re not using a financial planner, consider a free consultation. The process of having a professional review your employer sponsored retirement plan in addition to other investments and savings, can help you determine if you are on track.
Savings Tip #10 – There is a load of free content out there to help you improve your financial acumen. Commit to reading a finance blog weekly, or find a podcast. Make it a routine to listen to your podcast during your workout, or on your commute from work.
Again, it’s easy to say you want to save more money or trim expenses in 2021, but making intentional is key.
For more information on how Ballast Advisors helps clients with personal financial planning, executive benefits, and saving for retirement, and see www.ballastadvisors.com/. Our financial advisors serving the Twin Cities and Southwestern Florida can help you reach your retirement and financial goals. Our offices are located in Woodbury, MN, Arden Hills, MN and Punta Gorda, FL.
IMPORTANT DISCLOSURES
The opinions expressed are those of Ballast Advisors, LLC. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. These opinions contain references to material provided by third-party sources believed to be reliable but cannot be guaranteed for accuracy.
Ballast Advisors, LLC is a registered investment advisor under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about the firm, including its services, strategies, and fees can be found in our ADV Part 2, which is available without charge upon request. The opinions expressed herein are those of Ballast Advisors, LLC and are subject to change without notice.
Originally Published on: Jul 1, 2019
If you leave your job (voluntarily or involuntarily), you’ll be entitled to a distribution of your vested balance. Your vested balance always includes your own contributions (pre-tax, after-tax, and Roth) and typically any investment earnings on those amounts. It also includes employer contributions (and earnings) that have satisfied your plan’s vesting schedule.
In general, you must be 100% vested in your employer’s contributions after 3 years of service (“cliff vesting”), or you must vest gradually, 20% per year until you’re fully vested after 6 years (“graded vesting”). Plans can have faster vesting schedules, and some even have 100% immediate vesting. You’ll also be 100% vested once you’ve reached your plan’s normal retirement age.
It’s important for you to understand how your particular plan’s vesting schedule works, because you’ll forfeit any employer contributions that haven’t vested by the time you leave your job. Your summary plan description (SPD) will spell out how the vesting schedule for your particular plan works. If you don’t have one, ask your plan administrator for it. If you’re on the cusp of vesting, it may make sense to wait a bit before leaving, if you have that luxury.
While this pool of dollars may look attractive, don’t spend it unless you absolutely need to. If you take a distribution you’ll be taxed, at ordinary income tax rates, on the entire value of your account except for any after-tax or Roth 401(k) contributions you’ve made. And, if you’re not yet age 55, an additional 10% penalty may apply to the taxable portion of your payout. (Special rules may apply if you receive a lump-sum distribution and you were born before 1936, or if the lump-sum includes employer stock.)
If your vested balance is more than $5,000, you can leave your money in your employer’s plan at least until you reach the plan’s normal retirement age (typically age 65). But your employer must also allow you to make a direct rollover to an IRA or to another employer’s 401(k) plan. As the name suggests, in a direct rollover the money passes directly from your 401(k) plan account to the IRA or other plan. This is preferable to a “60-day rollover,” where you get the check and then roll the money over yourself, because your employer has to withhold 20% of the taxable portion of a 60-day rollover. You can still roll over the entire amount of your distribution, but you’ll need to come up with the 20% that’s been withheld until you recapture that amount when you file your income tax return.
Assuming both options are available to you, there’s no right or wrong answer to this question. There are strong arguments to be made on both sides. You need to weigh all of the factors, and make a decision based on your own needs and priorities. It’s best to have a professional assist you with this, since the decision you make may have significant consequences — both now and in the future.
Reasons to consider rolling over to an IRA:
Reasons to consider rolling over to your new employer’s 401(k) plan (or stay in your current plan):
When evaluating whether to initiate a rollover always be sure to (1) ask about possible surrender charges that may be imposed by your employer plan, or new surrender charges that your IRA may impose, (2) compare investment fees and expenses charged by your IRA (and investment funds) with those charged by your employer plan (if any), and (3) understand any accumulated rights or guarantees that you may be giving up by transferring funds out of your employer plan.
In general, if you have an outstanding plan loan, you’ll need to pay it back, or the outstanding balance will be taxed as if it had been distributed to you in cash. If you can’t pay the loan back before you leave, you’ll still have 60 days to roll over the amount that’s been treated as a distribution to your IRA. Of course, you’ll need to come up with the dollars from other sources.
Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2019
If you’re interested in receiving additional financial advice, contact Ballast Advisors for a complimentary consultation at a location near you:
Ballast Advisors – Woodbury
683 Bielenberg Dr., Suite 208
Woodbury, MN 55125-1705
Tel: 651.478.4644
Ballast Advisors – Arden Hills
3820 Cleveland Ave. N, Ste. 500
Arden Hills, MN 55112-3298
Tel: 651.200.3100
Ballast Advisors – Punta Gorda
223 Taylor St., Suite 1214
Punta Gorda, FL 33950-3901
Tel: 941.621.4015
