Mon. Dec 4th, 2023

With the migration from company sponsored Defined Benefit Plans to Defined Contribution Plans such as a 401(k), 403(b) or Deferred Compensation (457), it is critical to choose the correct plan, allocate your assets according to your objectives and designate the appropriate beneficiary(ies).

Having been in business for over 25 years we have been witness to some mistakes in each category.

Assuming that you are in a combined Federal and New York State tax bracket of 30%, it is generally to your benefit to choose a retirement plan that allows for tax deductible contributions. If we use the tax brackets above as an example, for every $1,000 deposited into the plan, your tax savings would be $300. Therefore, saving $1,000 would only cost you only $700. The other $300 would be tax savings.

As a rule of thumb, remember that it is better to choose plans that allow for tax deductible contributions if you are in a relatively high tax bracket versus plans that do not allow for tax deductible contributions. The opposite holds true if you are in a low tax bracket.

Most company sponsored plans now offer tax deductible contributions defined as a Traditional 401(k), 403(b) or 457 as well as Roth 401(k), 403(b) and 457. Traditional plans offer tax deductible contributions and taxable withdrawals while Roth plans offer non-deductible contributions and tax-free withdrawals. Keep in mind that regardless of whether you choose the Traditional or Roth, both may levy tax and penalties should you need the money prior to normal retirement age.

Please check with your tax advisor prior to investing.

After selecting the plan that fits your needs, your next job is to fund the plan. Under this category, try to deposit at least an amount that maximizes your employer match, should there be one. Most employees tend to become too conservative with their investment strategy or concentrate their deposits into company stock. Both are mistakes. As a rule of thumb, we would recommend those under 50 with more than 10 years until retirement invest on no more than a 3:1 ratio of stocks to bonds.

Those over 50 with five to 10 years should use a ratio of no more than 2:1 stocks to bonds while those within five years of retirement 1:1 stocks to bonds. Those under 40 with more than 20 years until retirement should invest nearly their entire balance in the stock market. Once again, every situation is different so consult your advisor.

An asset allocation mistake that we have also noticed is having an over-concentration of contributions and accumulated balances in the stock of the company you are employed by.

In the Capital District, some employees of General Electric have deposited more than 50% in their company stock. We believe that in so doing, you are assuming an undue amount of company specific risk and creating an undiversified portfolio that has a low correlation and low level of predictability relative to the total stock market.

This can lead to a high level of volatility and poor performance.

On the flip side, upon retirement and the attainment of age 72½, make certain that you are taking mandatory retirement distributions. Coordinate this with you planner and/or tax advisor. Also, keep in mind that the tax on the withdrawal that should have been made but was overlooked is 50 percent, a pretty steep penalty.

Let’s now touch on the designation of a beneficiary or beneficiaries. First and foremost, make certain that you designate a beneficiary. Should you fail to choose a beneficiary, your estate becomes the beneficiary by default. If married, you will lose the valuable spousal rollover option as well as the option to stretch the payout beyond the life expectancy of the beneficiary.

Finally, make certain that you designate contingent beneficiaries that will receive the proceeds from your retirement plan should the primary beneficiary predecease the account holder.

Please note that all data is for general information purposes only and not meant as specific recommendations. The opinions of the authors are not a recommendation to buy or sell the stock, bond market or any security contained therein. Securities contain risks and fluctuations in principal will occur. Please research any investment thoroughly prior to committing money or consult with your financial advisor. Please note that Fagan Associates, Inc. or related persons buy or sell for itself securities that it also recommends to clients. Consult with your financial advisor prior to making any changes to your portfolio. To contact Fagan Associates, Please call (518) 279-1044.

By senior