PHOENIX — Whether you’re knocking on the door of retirement or not, understanding your 401(k) and its performance will increase your chances of gracefully aging with your finances.
On the latest episode of The Asset Preservation Hour, financial advisor Stewart Willis advocates for investing in a 401(k) plan, as it is “a very easy way to save money for retirement.”
“Some of my wealthiest clients are people that just, as they got raises, put all of their raises into their retirement plans,” Willis said. “You do want to be aware of certain things like fees. … I’m very critical of the investments we have inside our 401(k) system.
As an investment advisor, he looks at the different benefits coming to the investor and the company owner. … But it’s better to participate than to not participate at all in a 401(k).”
Willis made the key distinction between putting your money with a financial advisor such as himself and your own employer.
While Asset Preservation Wealth & Tax can set aside funds in custodians such as Charles Schwab or Fidelity, Willis said it does not match contributions like an employer can.
“I’m not matching. Generally, your employer does,” Willis said. “That’s free money that you need to be taking advantage of because there’s nothing like free money.”
Why might some 401(k) plans underperform?
It may be true that it’s better to get in on the action than not at all, but some retirement plans are littered with “clunker” funds.
According to Kiplinger, 70% of 58,000-plus corporate 401(k) plans in a recent study contained at least 10 clunker funds over three to five-year return periods. That’s why it is vital for clients to understand existing fees or the cost of the plan.
One strategy the study suggests is to invest in “foolproof funds,” which are defined as “low-cost, well-diversified index funds that keep pace with the market and other benchmarks.”
“Backwards-looking performance testing is one of the biggest mistakes people can make when it comes to investing,” Willis said. “You’ve got to look over longer, broader periods of time and make sure that you know what you’re doing.”
Willis added that once a client turns 59 1/2, they unlock an “in-service rollover option” on their 401(k) where a financial advisor can manage it “without disturbing it.” However, the option may not make sense for those who borrow against their plan or if you live in a state that doesn’t have favorable legal protections, which Willis said isn’t the case for Arizona.
Why living trusts are more advantageous than wills
Asset Preservation Wealth & Tax has handled living trusts for more than 25 years, and Willis recommends it as a sensible complement to a will.
“It’s a very simple step,” Willis said of investing in a trust, which they sell for under $1,000. “Our commitment to our clients is we’ll be there for you. … But you need to have your affairs in order. And generally, the living trust makes it way easier to avoid the process of probate.”
While it is important to review the listed beneficiaries in your will and trust (spouse, children, etc.), Willis said he doesn’t recommend clients include retirement account information for the possibility of getting remarried and being stuck in a shared assets mess.
Special instructions, such as having a portion of your money go to a family friend to take care of your pets, you do want to include in a trust because vague beneficiary information can lead to misuse of your wealth after you are gone, according to Willis.
Claim a free portfolio review by Asset Preservation Wealth & Tax online, or call 877-573-8437 for more information.
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