A transplant to the Northwest, I recently developed a penchant for hiking. It’s necessary to point out the fact that I’m not a native of the Pacific Northwest, if only to highlight the amount of wonder that I experience every time I venture beyond the city limits. For me, every step reveals something new and exciting that I never encountered in the Midwest. Hiking in Ohio is quite literally a walk in the park compared to the trails out here, and I’ve learned the importance of being organized and prepared. Not long ago, I was packing for a trip to Mount St. Helens, going through my checklist, and my thoughts turned to retirement planning. In part because I knew that I had this blog to write once I returned, but also because I’m actually passionate about the subject. Much like hiking, planning for retirement requires some forethought and strategy. With that in mind, here are my top three hiking/retirement planning tips!

Don’t lose sight of the trail while hunting for Sasquatch...

We’re often asked, “what is the best investment?” This is a simple question that warrants a complicated answer because factors like age, risk tolerance, and estimated retirement date can all influence an individual’s investment strategy.

The Putnam Institute completed a study in 2012 that showed the impact of selecting the top performing investments quarter over quarter (labeled the “crystal ball strategy”) vs. increasing your savings rate. The study revealed that while the crystal ball strategy yielded a higher account balance than the base case, a 1% increase in savings rate “had a wealth accumulation impact 30% larger than the crystal ball fund selection strategy”. In other words, we can’t always control selecting the “best” fund, but we can control how much we save.

I’m not saying that we should stop trying to invest well, (or that we should stop hunting for Sasquatch for that matter). I am suggesting that focusing too much on finding the best investments, can distract from other facets of retirement planning that are just as important.

Quality gear is worth the extra expense...

The retirement planning side of this tip is that saving more now, will greatly impact your savings in the long run. This is something that we all know, but it can be difficult to commit to increasing your savings rate until you see the actual numbers. For example, saving in your 20’s and 30’s has a greater impact on your lifetime savings than saving later in life. Due to, compounding returns, someone who saves $4,000 a year from age 30 to age 40 will end up with a greater balance at 65 than someone saving $4,000 a year from 40- 65, assuming a 7% rate of return. I know that statistic seems hard to believe, but check it out, it’s true!

There’s always another mountain...

It’s important to remember that the day you retire isn’t the end of your journey. A 2012 CDC study reported that life expectancy is 78.8 years, which is up from 70.8 in 1970. The point being, often times when transitioning into retirement, retirees feel the need to preserve their “nest egg”. When in reality taxes, inflation, and health care expenses are eating away at their savings. By recognizing the dual purpose of retirement accounts; providing cash flow and growing for the future, you can climb the mountain right in front of you while also planing for the ones on the horizon.

Have questions about the transition from retirement savings to retirement income? We can help with that!

As far as the hiking goes, it’s going to take a long time for me to see all there is to see around the Pacific Northwest. Personally, Dog Mountain (seen on the right) is one of my favorites.

You should also note that if you’re hiking in the rain, “windbreaker” does not equal “rain jacket.” I may or may not have made that mistake.

Call or email us at 503-905-3100 or 401k@humaninvesting.com

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In Human Terms: What exactly is a 401k?

Don’t you hate it when you’re hanging out with your friends or family and they use a word in the flow of conversation and you have no idea what it means? Well, after meeting with thousands of 401k participants over the years we realize that often times speaking about retirement accounts can turn into one of “those” conversations. That’s why we wanted to start a series of blogs titled In Human Terms. The goal of these posts are simple, to break down financial lingo to its simplest form allowing you to build on your financial vocabulary and create your own glossary.

With that being said, we thought there was no better place to start than asking the question, what exactly is a 401k? Many of us have one today or have utilized a 401k in the past, but there are few who know how it started, what it is, and some simple do’s and don’ts when participating in one.

How it Started

The section of the IRS code that made 401k plans possible was enacted in 1978 and was intended to provide workers with a tax break on their retirement savings. In 1980, the real birth of 401k plans occurred when a benefits consultant took the IRS code and created a simple, tax-advantaged way for employees to save for retirement. From there, different amendments have been made, but 401k plans have turned into the primary tool for Americans to save for retirement.

What it is

Unlike a Defined Benefit plan where the employer promises to pay a defined benefit to retirees who meet certain criteria, 401k plans are a type of Defined Contribution plan, where employees make automatic contributions that are deducted from their paycheck. This money, that is sometimes matched by the employer, is invested at the employees discretion into one or more funds provided within the plan. At a minimum, employees will have the ability to invest in stock, bond, and money market funds. If investments grow over time in employees accounts, the gains are left untaxed on a year-by-year basis until taken out in retirement.

Do’s and Don’ts

Do’s If your employer provides a match, take advantage of it. If you do not know what your match is, or if your company offers one, feel free to call us (503.905.3100) right now! Put together an investment strategy that makes sense for your time frame and check in about every 6 months. If the words "investment strategy" don't mean anything to you, we can help you make sense of your 401k and creating a strategy. We've found that the most successful strategies come from participants who take time to set up a good plan and stick to it. Understand the specifics of your plan. Having a greater understanding of things like vesting schedules, loan provisions, and contribution types, can affect how successfully you invest in your plan and can save you money over time.

Don’ts

• Cash out when you change jobs. Ideally you do not have to cash out a 401k, especially if you are under 59 1/2. The consequences are large. For example imagine you have a $50,000 401k account and you are 40 years old. By cashing out, it’s possible that between the 10% penalty and paying federal and state taxes, your $50,000 becomes $30,000.

• Think of your 401k as a bank. 401k loans can be costly, especially if you leave your company. Before using your 401k for a down payment on a home or to take a trip, give us a call and make sure that there isn't another option.

• Put all of your money in the safest investment option. While not always the case, often times using a money market limits your long-term earning power and puts you in a position where your account is actually losing purchasing power when inflation is included.

Like most things, 401k’s are not perfect. However, if you are looking for an efficient and effective way to save for retirement, they are one of the best tools out there. We look forward to hearing from you soon, if not be on the lookout for the next In Human Terms blog!

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You may have more options within your 401k plan than you realize. A large number of retirement plans are adding a Roth 401k feature, allowing for additional flexibility with how participants save for their future.

Similar to Roth IRAs, Roth 401k’s are funded with after-tax dollars and offer tax-free growth and withdrawals in retirement. You may have access to this benefit through your current retirement plan and not even know it. In fact, a study published by the Harvard Business School noted that, in plans offering the Roth 401k, less than 9% of total dollars in the plan were saved using the Roth feature*. Truly, this can be an excellent way for retirement plan participants to save. Check out the comparison below...

All in all, it’s important to know whether or not the Roth 401k option is available in your retirement plan. And if it is, should you use it? Should you save into both the Roth and the Traditional 401k? We understand that these questions (like many investment-related questions) aren't always simple. That’s why we’re here to help you understand your options. Questions? Worries? Doubts? Let’s talk about it.

Reach us at 503.905.3100 or 401k@humaninvesting.com

*Sources

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The diversity in the people we work with is one of the main reasons we enjoy going on site and meeting with participants or talking with them on the phone. For the purpose of this post, we want to focus on those of you asking about retirement and more specifically how to turn your retirement savings into retirement income. We often hear questions like: should I leave my 401(k) with my company? When should I start taking withdrawals? Or, now that I won’t have an income, how much should I live on?

“Do you have a checklist, or a how-to-guide for transitioning my current 401(k) into retirement income?”

Recently we had a conversation with a woman who asked us, “Do you have a checklist, or a how-to-guide for transitioning my current 401(k) into retirement income?” What a great question! This inspired us to assemble a list of steps that addresses her question and other common retirement transition inquiries. So without further ado, here are 5 steps for turning your retirement savings into retirement income!

Step 1: Consolidate your retirement savings into one location

Whether you’re part of a dual income family or have had multiple jobs with multiple 401(k)’s, chances are you have various retirement accounts at numerous investment companies. The truth is, from a planning perspective and from an investment diversification standpoint, having your assets at a single place can provide simplicity and create the foundation to build a financial plan. Often times, this looks like rolling multiple 401(k)’s into an IRA.

Step 2: Identify sources of income

Once your accounts are consolidated, plotting out your different amounts and sources of income is a key next step. Typically, this looks like aggregating social security income, pension income (if applicable), income from retirement accounts, and other income (a part time job, income from a rental property, etc.). Having this information can provide a good baseline of what you are able to live on per year.

Step 3: Identify lifestyle need (how much are you hoping to live on per year?)

Sometimes people have trouble when the word “budgeting” is introduced to the planning process. So rather than creating a budget, create a spending plan (that sounds much more fun right?). By creating a spending plan, this allows you to look at the money you have coming in vs. expenses going out. By finishing this step, you get to see if your inflows are at a surplus or shortage compared to your expenses.

Step 4: Develop appropriate asset allocation and investment strategy

Okay so you’re here. You’ve done the legwork and now it’s time to invest your retirement accounts in a way that can enhance your retirement lifestyle and help you achieve your goals. A few things to consider when developing your allocation:

• Account for market risk by having an appropriate dollar amount in short term investments (money market/CD’s). This will allow you the flexibility of being able to get through the inevitable down market cycles without having to realize losses of long-term investments.

• Account for inflationary risk by having an appropriate dollar amount of your portfolio in long-term growth oriented investments such as US and international stocks. This creates the ability for your accounts to grow above inflation and fund your retirement for the long haul.

• Address dividend and income strategies that can enhance cash flow. By looking at investing in dividend paying stocks, individual bonds, and other cash flow generating investments, you may reduce the burden that your account has to grow each year to meet your spending needs. Having a combination of dividends, interest, and capital appreciation may be an optimal way to generate return over time.

Step 5: Repeat steps 2-4

Has there ever been a 5 step process that doesn’t include the word “repeat”? By continuing to monitor your income and expenses and making sure your asset allocation lines up with your goals, you are ready to start utilizing your portfolio as an income tool.

These steps are a great start when looking at turning your retirement savings into a plan that can generate retirement income. However, there are many other variables when considering using your retirement savings as income (taxes, how it effects social security, required minimum withdrawals, etc.). Remember that we are here to help and support you through this process. If you have any questions or would simply like to have a conversation about retirement please feel free to email or call anytime.

Helpful Links

• Taxes on Social Security Income

• College Savings Options

Have Questions?

Call Us: 503-905-3100 Email Us: 401k@humaninvesting.com

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