A RetireReady Publication | Winter Edition
Getting Better with Age
As the 401(k) Continues to Evolve, It Remains a Great Retirement Saving Strategy
Since launching in 1981, 401(k) plans have grown to become the most popular company retirement plan in the U.S. According to the Investment Company Institute, 401(k) plans hold $7.4 trillion in assets in more than 710,000 plans on behalf of nearly 70 million active participants, former employees, and retirees.
Saving in a 401(k) has never been easier. Many more employers now offer automatic enrollment with built-in automatic savings increases each year—along with robust investment decision support tools. Mutual funds, the most common investment choice, are more cost-effective than ever. Investment Company Institute research shows that the average equity and bond mutual fund expense ratio paid by 401(k) investors dropped more than half from 2000 to 2023. And, from 2008 to 2023, average target-date fund expense ratios have also dropped more than half. This is a powerful trend because lower fund expense ratios help support potentially higher returns over the long term (and a higher account balance in retirement). Here are six reasons your 401(k) continues to be a great retirement saving strategy:
Your savings are automatic. With your 401(k), you’re following the core financial planning principle of paying yourself first. Money is deposited from your paycheck to your account without you having to think about it. It doesn’t get much easier than that.
Tax-deferred compounding. You defer paying income tax on money that you save in a 401(k). Income tax won’t be due on this money until it is withdrawn in retirement. The money that would otherwise go to pay current taxes remains invested for greater long-term growth potential. As a result, any interest, dividends and capital gains you earn can benefit from the power of tax-deferred compounding.
Catch-up contributions. Employees who are age 50 or older are eligible to make additional catch-up contributions beyond the annual IRS limit. This is a significant benefit, especially if you’ve been unable to save as much because of competing financial priorities (such as saving for a college education or supporting aging parents). Catch-up contributions also benefit from tax-deferred compounding.
Free money, courtesy of the employer match. You should always aim to save at least enough to get a full employer match (subject to your plan’s vesting rules). For example, a 401(k) plan that matches 50 cents for each dollar saved in a 401(k) plan up to 6 percent of pay is a 50 percent return on your investment. A dollar-for-dollar 401(k) match doubles your money. That’s an excellent return despite current market volatility.
Your money goes where you go. If you leave your employer for any reason, you can take your vested balance (including the employer match) with you. It’s fully portable, and you can roll it into an IRA or a new employer’s 401(k) plan (if allowed).
Roth contribution option. If available to you, contributions to a Roth 401(k) are made with after-tax dollars (no tax deduction), but potential earnings and distributions are tax free, as long as you have held the account for at least five years and are at least 59½ years old. If you think you’ll be in a higher tax bracket during retirement, a Roth option may be a sound strategy. You also might consider diversifying your money between traditional and Roth 401(k) options.
Informational sources: Investment Company Institute news release: “401(k) Investors Benefit as Mutual Fund Fees Cut in Half” (July 16, 2024); Investment Company Institute 401(k) Resource Center (September 4, 2024); Investopedia: “401(k) Tax Benefits and Advantages” (September 11, 2024).
Will Power
Understanding the Typical Components of an Estate Plan
Estate planning can be difficult to think about but is critical to achieving financial wellness. In addition to designating how you want your assets distributed, an estate plan provides your health care directives, simplifies the probate process, and helps minimize taxes. It also helps protect loved ones by minimizing conflicts and ensuring their financial security. Typical components of a comprehensive estate plan include the following:
Last Will and Testament
This document outlines how you want your assets distributed after your death. It allows you to name an executor who will manage your estate, pay debts, and distribute your assets. You can also designate guardians for minor children.
Revocable Living Trust
A trust is a legal entity that can “own” assets. The document looks much like a will. And, like a will, a trust includes instructions for who handles final affairs and who receives the deceased’s assets. Today, many people use a revocable living trust instead of a will in their estate plan because it avoids court interference at death (probate) and at incapacity. To create a basic living trust, you make a document called a declaration of trust, which is similar to a will. You name yourself as trustee—the person in charge of the trust property. If you and your spouse create a trust together, you will be cotrustees. As long as you are alive and competent, you can change the trust document, add or remove assets, or even cancel it.
For a revocable living trust to work properly, you must transfer your assets into it. Titles must be changed from your individual name (or joint name with a spouse or partner) to the name of your trust. Because your living trust legally holds title to the assets it holds, these assets aren't considered a part of your estate and therefore don’t need to go through the probate process upon death or incapacitation. This makes it extremely easy for someone (e.g., a cotrustee or successor trustee) to step in and manage your financial affairs.
Durable Power of Attorney
This document designates someone to make financial decisions on your behalf if you are unable to do so. The chosen individual can manage your assets, pay bills, and handle other financial matters.
Health Care Power of Attorney
Also known as medical power of attorney, this document appoints someone to make medical decisions for you if you are incapacitated. This document ensures that your health care preferences are respected even when you can’t communicate them.
Living Will
A living will, or advance health care directive, specifies your wishes regarding medical treatments and end-of-life care. It can include instructions on life support, resuscitation, and other critical care decisions.
Beneficiary Designations
For assets such as life insurance policies, retirement accounts, and payable-on-death accounts, beneficiary designations are crucial. These designations override the instructions in your will, ensuring that these assets go directly to the named beneficiaries.
Creating an estate plan involves careful consideration and documentation to ensure that your wishes are honored and your loved ones are taken care of after your death. Consulting with an estate-planning attorney can help you navigate the complexities and create a comprehensive plan that meets your needs
Informational sources: Investopedia: “What Is Estate Planning? Definition, Meaning, and Key Components” (April 22, 2024); Empower: “5 Essential Estate-Planning Documents” (June 11, 2024); Legal Zoom: “A Smart Way to Avoid Probate: The Living Trust" (September 17, 2024).
Dear Diary
Consider the Benefits of Journaling to Boost Your Mind and Spirit
Journaling is the practice of writing down your thoughts, feelings, and experiences. It serves as a personal outlet for self-expression and reflection, allowing you to explore your inner self. There are many types of journaling, each with unique benefits. Here are three popular types:
Freewriting involves writing whatever comes to your mind by just letting the thoughts come and putting them on the page without any filters or concern about grammar, spelling, or storyline.
Gratitude journaling is writing down things you feel thankful for. This can be as simple as a sunny day, a good meal, or a smile from a stranger. The key is to focus on the positives—the things that bring you joy and comfort.
Reflective journaling is a process of recording and analyzing personal experiences, thoughts, and feelings. It can serve as a tool for self-exploration, helping you uncover insights into your motivations, values, and beliefs that you may not have been aware of.
Growth and Popularity of Journaling
Journaling has seen a significant rise in popularity over the past few decades. This growth can be attributed to increased awareness of mental health and the benefits of self-care practices. Studies have shown that journaling can reduce stress, improve mood, and enhance overall well-being. The digital age has also contributed to its popularity, with numerous apps and online platforms making it easier for people to start and maintain a journaling habit.
5 Best Practices
To help maximize the benefits of journaling, here are five best practices to consider:
Consistency. Make journaling a regular habit. Whether it’s daily or weekly, consistency helps reinforce the practice and its benefits.
Honesty. Be truthful in your entries. A journal is a private space, so allow yourself to be vulnerable and authentic.
Focus on positivity. Incorporating elements like gratitude or positive affirmations can shift your mindset and promote well-being.
Don’t overthink. There’s no right or wrong way to journal. Allow your thoughts to flow freely without judgment.
Review and reflect. Periodically reviewing past entries can provide insights into your growth and patterns in your thinking.
Retirement in Motion
Tips and Resources Everyone Can Use
Knowledge Is Retirement Power
For nearly 60 years, Medicare has been the program that retired Americans turn to for health care coverage. In 2023, it helped more than 65 million people pay for everything from hospital stays to doctor visits to prescription drugs. You become eligible for the program at age 65. Before enrolling, however, you’ll need to set aside time to review the many options offered and sign up for the coverage that best meets your health needs and budget. You can start signing up three months before you turn 65, and you’ll have until three months after your birthday month to complete your enrollment. If you miss that deadline, you may end up paying higher premiums. If you’re still working and have employer-sponsored health coverage, you can likely wait to sign up. For more information, check out the AARP Medicare Enrollment Guide, a step-by-step tool for first-time Medicare enrollees.
Q&A
What is the most I can save this year in my 401(k) plan?
401(k) savers can contribute up to $23,500 in 2025 (up from $23,000 in 2024). The annual catch-up contribution limit for savers ages 50 and older remains $7,500 in 2025, for a potential total contribution of $31,000. Under a change made in SECURE 2.0, a higher catch-up contribution limit applies for employees ages 60–63. For 2025, this higher catch-up contribution limit is $11,250 instead of $7,500, for a potential total contribution of $34,750. These limits also apply to 403(b) plans and most 457 plans.
Quarterly Reminder
When was the last time you reviewed your beneficiary designations for your major assets—including your retirement plan? The start of each new year is a good time for financial housekeeping. Be sure that your current designations still match your wishes, especially if you have had major life changes, such as marriage, divorce, or the birth or adoption of children.
Tools and Techniques
According to a survey by U.S. News & World Report, nearly half of Americans believe carrying a credit card balance improves their credit score. Unfortunately, carrying a balance is likely to lower your score—and cost you money in interest payments. That’s because an important factor in your credit score is how much of your available credit you use (known as your credit utilization ratio). Aim to use less than 30 percent of your available credit. If you have a $5,000 credit limit, for example, try to keep your balance under $1,500. It’s a sign to creditors that you aren’t stretching yourself too thin.
Corner on the Market
Basic Financial Terms to Know
Microeconomics. The study of how individuals and businesses make decisions about allocating limited resources. It focuses on how these decisions affect individual markets, industries, and sectors, rather than the economy as a whole. Creating a budget to put yourself in a better financial position is an example of microeconomics.
This material has been provided for general informational purposes only and does not constitute tax, legal, or investment advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a qualified professional regarding your situation. Commonwealth Financial Network does not provide tax or legal advice. Investments are subject to risk, including the loss of principal. Some investments are not suitable for all investors, and there is no guarantee that any investing goal will be met. Past performance is no guarantee of future results. Talk to your financial advisor before making any investing decisions. Third-party links are provided to you as a courtesy and are for informational purposes only. We make no representations as to the completeness or accuracy of information provided at these websites. Authored by the Strategic Retirement Solutions team at Commonwealth Financial Network.
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