Why you should consider a Solo or Individual 401(k) if you’re self-employed

If you are self-employed or have any self-employment income, you’ve probably wondered about the different types of retirement accounts available to you. Three of the most common types of accounts are SEP IRAs, Simple IRAs, and the Solo or Individual 401(k) plan. This recent post I wrote gives more information on these three account types. Here, I’ll focus on the Individual 401(k) and why it might be right for you.

The Individual 401(k) plan is, in many cases, the better choice for self-employed people because of several key benefits that aren’t available with the SEP or Simple options. (more…)

Self-Employed: What are your retirement saving options?

Being self-employed has many advantages compared to being an employee of a firm. However, retirement planning isn’t quite as easy as signing up for the company 401(k) plan like many of your friends do. That said, with some guidance from a qualified professional, you too have many excellent options. Below are a few choices to consider when planning for your retirement. I’ve focused on the options for those who are self-employed and do not have any employees, but the SEP and Simple options below are also available to those with employees.

Simple IRA

A Simple IRA is one option for self-employed individuals. The Simple IRA contribution limit is made up of two parts: employee salary reduction contributions and employer contributions. The employee contribution is limited to $11,500 for 2012. If you are over age 50, you can also make a catch-up contribution of $2,500 for 2012. And, since you are also the employer, you can then make an elective employer match of 3% of net self-employment earnings. You can deduct contributions up until the due date of your tax return, but you need to have the plan set up by October 1st of that tax year unless you are a new business. (more…)

Are you saving enough in your 401(k) to retire comfortably?

I am asked this question often, which is good because if someone is not saving enough we can make adjustments and get them on the right track. The people I worry about are the ones who don’t ask this question, either of me or of themselves. Maybe they are afraid of what the answer might be or they figure their employer or the custodian of the plan is looking out for them. Well, typically they aren’t.

In 2006, the Pension Protection Act went in to place. This was a nice step towards increased retirement savings, even for the most complacent of employees. This Act allows employers to automatically enroll their employees in the company 401(k) plan. Everyone has the ability to opt out, but they have to request it. Due to human nature, we tend to follow the path of least resistance, so the results were a huge increase in 401(k) plan participation. According to a recent study done by Aon Hewitt Associates, the participation rate in company 401(k) plans is now at 85% compared with 67% for companies who do not have an automatic enrollment program.

So if you are automatically enrolled in to your company’s 401(k) plan, will you have enough money to retire? The answer is: Not likely. You will need to dig a bit deeper in to your personal situation.

The Pension Protection Act I mentioned also allows companies to set an initial default contribution amount. So a company could automatically enroll an employee in their 401(k) plan, designating for example, 3% of that person’s salary for deposit in to the 401(k) plan. This has turned out to be good and bad. The good news is that the complacent employee is participating in the 401(k) plan and automatically contributing 3% of their salary, unless they make the effort to opt out. The bad news is that 3% savings per year of your salary is not likely going to get you through retirement, unless you are expecting to really reduce your standard of living.

Let’s assume our complacent employee is named Larry. Larry makes $50,000 a year and is 35 years old. He plans to retire at age 65. If Larry adds 3% per year to his 401(k) plan (because he just can’t be bothered to opt out or add more), he will have added $45,000 over 30 years (this is before any investment gain).

If Larry made no investment selections for his 401(k) plan (which we know he probably wouldn’t, as he is Lazy Larry), then he would have automatically been invested in the money market. This would amount to about $45,000 in today’s dollars of spending money when he turns 65. Even with some Social Security, that isn’t going to last Larry long. (more…)

Is Your 401(k) Healthy?

If you are like most of us, you likely visit your doctor’s office at least a couple of times a year. But when was the last time you had a check-up for your 401(k)?

It would not surprise me if you said, “not in quite a while”. But getting a financial check-up for your 401(k) account is extremely important, especially given the heightened economic issues and market turbulence over these last few years.

One of the many benefits of being a Merriman client is that we have the tools to help you align your 401(k) investments once a year. All you have to do is provide us with the mutual fund choices within your 401(k).

(more…)

Solution for a lack of choices in company sponsored retirement plans

I use your investment strategy for my Roth IRA and Rollover IRA.  My current employer uses Prudential for my company’s 457 plan.  Looking at the options, I cannot seem to use your allocation strategy due to a lack of choices.  Do you have any suggestions?

A recurring theme in most plans is a limited number of investment options.  This restricts your ability to properly allocate and diversify your account.

If you find yourself in this situation the allocation tactic described below is a simple and practical way to get your portfolio on track.

(more…)