Following is a list of Frequently Asked Questions from our Participants (click on a Question to reveal the Answer):
Q. Why do I need a 401(k) Plan?
A.If you DON’T have a 401(k) or other retirement savings plan in place, where will your money come from when you retire? According to the Social Security Administration, as of May 2018, the typical American receiving Social Security gets an average monthly benefit of $1,294, or $15,528 annually. Can you afford to live on this amount? If not, you will need the rest of your income to come from somewhere else…IE your 401(k) or other source of money ear-marked for retirement.
Q. How much will I need to save in my 401(k) order to retire?
A. According to the AARP, it’s a well touted rule of thumb that if you’d like to be “comfortable” in retirement, you will need to provide yourself with 70-80% of your pre-retirement income. But the real answer to this might come down to what you’ve saved and how (well) you plan to live. Although everyone is different, studies do show that spending doesn’t always go down in retirement as much as one might think. To make sure you’re prepared, use our financial calculators, and complete a budget worksheet to get a realistic picture of your spending.
Q. How much should I be contributing to my 401(k)?
A. Although it’s often suggested that people who save 10-15% of their salary throughout their career will be well positioned for retirement, there really is no universal rule of thumb. There are many factors to consider. If you are over 40 and just getting started, YOUR deferral amount will need to be higher because you’re making up for lost time. Conversely, if you know you’ll have other sources of money (IE farm or other property income) that will supplement your monthly income at retirement then your number will be less than someone who needs to rely entirely on their retirement account.
People are often told that they should be “saving as much as they can”…but this leaves much room for error. If you really should be saving 15% of your salary but are unwilling to make the necessary lifestyle adjustments to do so, it becomes pretty easy to say “I am only saving 6% – but its ok because it is as much as I can afford”…. when that very well might not be truly the case.
We recommend speaking with a professional to find out if you’re on the right track. You can also use our financial calculators which will help to evaluate if any improvements need to be made to your current savings amount. One thing remains constant- the sooner you start or make improvements, the better off you will be.
Q. Which is better – Pre-Tax or Roth?
A. The main difference between the pre-tax and Roth 401(k) is whether you pay taxes now (Roth) or at the time you take the money out (pre-tax).
Some people are better off choosing to contribute pre-tax dollars to their 401(k) plans because their income will be generally lower in retirement. Keep in mind also, if you’re someone who wants to contribute as much as possible, but can’t afford as much as you’d like, pre-tax contributions will have less of a negative impact on your take home pay considering this deferral is taken before taxes are assessed.
If you think your income will be higher in retirement, the Roth 401(k) might make more sense. OR for example, if you’re early in your career and expect your income to rise significantly in your remaining working years…or if you just plain don’t expect to use the money in 30 years or more, you could consider paying the taxes now as opposed to later. Taxes tend to go up over the years. According to Forbes, tax rates could continue to increase to pay for our national debt, the baby boomers’ Social Security and Medicare bills.
Your best bet would be to consult with a tax advisor who can evaluate which option would be most suitable for you. You can also use our Roth vs. Pretax calculator as a guide.
Many employers allow their employees to contribute both ways, so you may have the option to take advantage of both choices. Contact us if you’d like to find out what your plan allows.
Q. How do I select the appropriate investments in my 401(k) plan?
You signed up to contribute to your retirement account and now you need to select your investments. This can be the most confusing part of retirement planning, as you will want to consider factors such as age, time horizon to retirement, current savings amount, risk tolerance, and others. It can seem complicated, but it doesn’t have to be.
At TPC we have simplified the process for you. As a participant in one of our 401(k) plans, you have 5 risk-based portfolio options to choose from. If you’re unsure which option is most suited for you, simply complete our “Risk Portfolio Questionnaire” which may help to point you in the right direction. Just take a moment to answer each question, and then check the report at the end to find out what your answers say about your investment style. If you would like to discuss this with someone further, please contact one of our representatives.
Q. When/how can I take money out of my 401(k) Plan?
A. The answer to this will depend on what your particular plan allows. Not all 401(k) plans have the same stipulations when it comes to loans or distributions prior to retiring or separating service. For your specific plan information you can refer to your summary plan description (that you would have been provided with in the enrollment process). You can also call TPC or your dedicated plan advisor (if applicable) to find out more.
It is generally discouraged to tap into your retirement savings prior to retiring. Even small withdrawals here and there can greatly impact the amount you will have available to you at retirement.
If you are separated from service from your employer, the funds typically become available to you. At that time you will have the option to roll the money over to another qualified plan, keep it in the plan (pending certain minimum balance requirements), or take the money as cash.
It’s important to note that if you decide to take all or a part of your account as cash, some or all of the money could be taxable to you upon distribution. What’s more – if you cash out under the age of 59 1/2, you might also become subject to an IRS early withdrawal penalty of 10% in addition to federal and possible state taxes. If you’d like to discuss your options in greater detail contact TPC or your dedicated plan advisor (if applicable).