For many people, the 401(k) is the cornerstone of their retirement. But 401(k)s can be confusing. We sat down with Casey Mulcare, an Allstate Insurance Agent based in Wheaton, Ill., to get his answers to questions on your retirement fund, regardless of your age. Here are some tips to help you understand and protect your savings and investments.
1. Why is it important to work with someone who can help you watch your 401(k) allocations?
Simply put, most people don’t watch it themselves. In fact, many people find it difficult to watch their allocations properly, which is why hiring a professional adviser is a smart choice. I recommend that you start young—the more time you have, the more aggressively your money can grow. I work with people as young as 20, and urge them to stick $100 a month in their 401(k)—they’re not going to miss it, and it will work to their benefit come tax season.
2. What is the best tip you can offer about trying to allocate your portfolio?
First of all, it is important to understand diversification, which means that the underlying holdings are varied. Many people think their allocations are diverse, but they are actually allocating to different companies in the same sector. Diversifying your portfolio will help to keep your funds balanced, instead of unstable. If you think of your 401(k) as a teeter-totter, individuals who just have large growth stocks could see sizable losses in their portfolio during down markets, versus an individual who has a variety of holdings (utilities, bonds, commodities, etc.) that will keep their teeter-totter more centered. Working with a financial professional can help to ensure your account is actually diverse.
3. What happened in 2008 that changed the way 401(k)s work in corporate America?
In 2008, the U.S. experienced the worst financial crisis since the Great Depression. There was a collapse of large financial institutions and many people lost large chunks of their 401(k). Following the crash, some companies moved the automatic allocations into less risky fixed/conservative accounts, with less than 1 percent growth. So now, if an employee does not want to be conservative with their 401(k), they have to initiate their allocation changes on their own, which can sometimes be confusing and require an expert’s help.
4. What are your 401(k) options if you move jobs or are no longer employed with your former company?
When you terminate employment with an employer, your 401(k) remains under its current management. In some cases the previous employer no longer covers the fees associated with the account and they are passed on to you. At this point, you have the option to leave your funds in this 401(k), but you should note that the fees may increase, and the access to your account could be more difficult.
I recommend setting up an IRA—an account which allows your retirement funds to grow tax-deferred. With this account, you can better manage your fees and how your money is invested. If you start a new job, you can assess whether to roll over your funds to the new company’s 401(k) plan or whether it’s a better option to start a new 401(k).
Many people in today’s economy are facing hardship and are tempted to withdraw funds from their 401(k). According to Wells Fargo, withdrawing funds prior to retirement could trigger a taxable event. It is best to discuss any withdrawals from retirement accounts with a financial professional first.
5. Are there situations where someone should select alternative retirement investments (other than 401(k) or IRA)?
Yes, in certain situations, individuals who are self employed or in a higher tax bracket might want to consider nonqualified accounts that may provide them with a better income tax position at retirement.
Allstate Agent Casey Mulcare is based in Wheaton. Address: 1811 N. Main, St. Ste. D, Wheaton, IL 60187. Phone: (630) 653-2570