Allworth Tip: New Jobs and Old 401 (k) s
Amy Wagner of Allworth Financial advises on how to convert old 401 (k) s into new investments when changing jobs.
Allworth Financial, Cincinnati inquirer
Q: TD from Boone County: I’m almost embarrassed to admit it, but I’m 54 and still have about $ 50,000 in student debt. Can I still retire? I saved $ 200,000, but the debt worries me.
A: We now live in a time when student debt is no longer just a problem for the “youth”. Borrowers like you (over 50) are now the fastest growing cohort of student loan debt, with about 8.7 million outstanding, according to Bloomberg.
In some cases, they took out loans on behalf of a child or grandchild; in others they went back to school themselves. But whatever the reason, it is becoming more and more of a financial burden: The debt burden of this group has risen by 50% in just four years; those 50 to 61 year olds owe about $ 43,000 on average, while those 62 and older have about $ 39,000. And this is one of those cases where the accrual of interest works against you; many borrowers now owe more than they originally took out.
The best way to know whether you can retire is to start planning – now. You need to figure out how much income you will have during retirement (through social security, debt, pension, etc.) and then calculate your expenses – which of course needs to include payments for that debt as well. If the numbers don’t work, you may need to postpone retirement or adjust your budget. And just so that you are aware that part of your Social Security benefit could be forfeited if you are retired and not receiving federal loans.
It is also important to understand the type of credit you have. Since federal student loans have what is known as death and disability relief, you don’t have to worry about passing unpaid debts on to family or heirs. Private student loans, on the other hand, can potentially be passed on.
Here’s the Allworth tip: start calculating the numbers now so you have time to make any adjustments you need. If you need advice, a fiduciary financial advisor can help you assess retirement cash flow. And most importantly, stay up to date with your payments. You can also consider income-oriented repayment plans (assuming you have federal loans).
Q: Tony from Mount Healthy: My son is 23 and just got his first job offering a 401 (k). Besides the full match, is there anything else you can give him advice?
A: He is young and probably in a low tax bracket. So if the company offers a Roth 401 (k), they should consider using that for the majority (if not all) of their posts. Although there is no upfront tax break, the account will grow tax-free and he will eventually be able to make tax-free withdrawals in retirement.
He should also look at the plan’s “exercise schedule”. In plain English, this is the time he has to spend with his employer so that 100% of the company’s contributions come from him. There are different types of vesting, ranging from “immediate” to “gradual” (20% after one year, 40 after two years, etc.) to “cliff” (e.g. 100% after three years). This is important to know as young people tend to change jobs frequently – if he starts looking for a new job in 2½ years but has fully earned after three years, for example, he may want to hold off his job search a little longer .
The Allworth advice is that he should familiarize himself with his 401 (k) plan. And more importantly, you’ll save on top of what it takes to get full game. His ultimate goal should be to save 20% of his income.
Amy Wagner and Steve Sprovach from Allworth Financial answer your questions every week. If you, a friend or someone in your family has a money problem or problem, feel free to send these questions to [email protected].
The answers are for informational purposes only and individuals should consider whether a general recommendation in these answers is appropriate for their particular circumstances based on investment objectives, financial situation and needs. To the extent that a reader has questions about the applicability of any of the specific topics discussed above to their individual situation, they are encouraged to seek advice from a professional advisor of their choice, including a tax advisor and / or attorney. Retirement planning services offered by Allworth Financial, an SEC-registered investment advisor. Securities offered by AW Securities, a registered broker / dealer, member of FINRA / SIPC. Call 513-469-7500 or visit allworthfinancial.com.