Author Archives: Chris Costello

6 Step Blueprint for your 401k (Part 2)

In our previous blog post we covered the first three tips you need to keep in mind when investing your 401k (for those of you that are dead-set on doing your 401k by yourself). In case you missed it, here they are: favor index funds, select the right stock to bond ratio, and diversify. And as promised, here are the final three tips:

4. Rebalance your 401k: In a nutshell, this wonderful tactic keeps your portfolio invested near the original percentages that you selected above in Step #3. Some folks do this manually, some custodians provide you with tools to help you set this up on a regular basis, and some folks hire professionals (like blooom) to do it for them. The beauty of rebalancing is that it trims from your funds that have done well and adds money to funds that haven’t. This may seem counter-intuitive but if you think about it for awhile is starts to make sense. Buy low, sell high. Buy low, sell high. Buy low, sell high…

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6 Step Blueprint for your 401k (Part 1)

So you have one of these “401k thingys” through your employer. Hopefully you have been socking money into it just like your Mom or Dad taught you. The balance has been growing these past 5 years but you still wonder if you picked the right investments that day you sat down with the enrollment paperwork with no 401k advice.

But you have this nagging feeling that you are in over your head.

Your Human Resources person won’t give you advice on whether you still have the right funds and you would ask the guy in the cubicle next to you (since he is always bragging about his investing prowess) but he is too much of a know-it-all to flatter him with your questions. It is hard to find 401k advice.

You tried calling the 1-800 number to the company where your 401k is being held – no help there either, just some confusing suggestions. Maybe you have even ventured online and googled “401k help” or “401k advice” but when the search returned over 17 million web pages you opted to check your Facebook page instead. Perhaps, you were brave enough to login to your 401k account and see if there were any tools you could use to help with all this. If you were able to work your way past all of the complicated Wall Street jargon, you might have found a tool to help you with you investment choices but in all likelihood, if you made it to the point of actually making changes to your portfolio – you left frustrated by how intimidating and confusing the interface became once it was time to pick your investments.

Rest easy my friend, you are not alone.

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If You Don’t Sell You Don’t Lose

When the value of your 401k drops I would be willing to bet that you say “I lost money in my 401k.” If this is the case, let me be the first to correct your vernacular in this instance. The correct way of describing the drop in your 401k value would be to say “My 401k declined in value.” The point I am making here is that your 401k value will fluctuate (and indeed drop) in value from time to time. But for you to LOSE money in your 401k it takes an additional action on your part to cause the loss.

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When to Start Contributing to your 401k?

At blooom, we are huge advocates for starting to save early and often for your retirement. We are commonly asked the question – I still owe money on my student loans –is it OK to start contributing to my 401k?

Often times people are advised to pay off all of their debts (other than a mortgage) before beginning to save for retirement. I disagree with that strategy.

If you work for a company that offers a pre-tax retirement savings account like a 401k, 403b, or similar AND that company offers a match based on your contributions I think it would be foolish to pass up this free money while you are busy paying off debts. You would be missing out on a guaranteed return on your money by not contributing to your 401k. If you are still saddled with student loan debt, credit card debt, car loans, etc – my advice would be to contribute just enough (and not a penny more) to get the maximum match from your employer. All other excess funds should be aggressively applied to paying down your debts from smallest balance to largest balance – the Debt Snowball method that Dave Ramsey has advocated for years. Once these debts are paid off you can ratchet up your contributions to 10% or more.

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What The Heck Does “Pre-Tax” Really Mean?

You may have heard the term “pre-tax” in the context of your company sponsored retirement plan (401k or similar). What you may not realize is just how beneficial, and rare, that term really is.

Let’s Assume Your Employer Offers a Retirement Savings Plan Like a 401k.

These types of tax-favored retirement plans allow participants to contribute some of their salary to their 401k account before taxes are assessed. If you don’t contribute anything to your 401k, your friends at the IRS will assess taxes on ALL of your salary.

So let’s also assume that your salary is $50,000. From that, you choose to contribute 10% per paycheck to your 401k. That means you contribute $5,000 (10% of $50,000) into your 401k. To your benefit, the IRS is now only able to tax you on $45,000, NOT your $50,000 salary. This is because your 401k contribution is taken from your paycheck pre-tax. (Note: Pre-tax does not mean you avoid any FICA taxes. You may owe Social Security and Medicare tax, for example. FICA taxes are based on gross pay.)

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