The 4-peat nobody asked for (Retirement Funds)

The educational portion of this newsletter focuses on retirement funds

The good news is that we can all still use TikTok (for now). The bad news is that the markets are still battling the September Effect. *cues Green Day*

If you ever want to ask us anything, provide feedback, submit a request, talk to someone about cats, feel free to email us or DM us on IG or Twitter.

This Week’s Biggest Headlines

  • Markets aren’t able to shake off the September Sell-Off. So far, the S&P 500, Dow and Nasdaq have declined 7.3%, 5.7%, and 9.4%, respectively. It’s looking likely that indices will mark its fourth consecutive week of losses. Read more.
  • House Democrats are working towards a new $2.4 trillion stimulus plan. It would include aid to small businesses and airlines, paycheck protection, enhanced unemployment insurance, and another round of payments to Americans. It has not been approved by the Senate yet, but the pressure is on for an agreement to be reached. Read more.
  • First-time unemployment claims continue to stay under 1 million. Relative to the rest of the country, Georgia, New York, New Jersey and Massachusetts have all reported a disproportionately higher number of claims. Continuing claims remain over 12 million (although lower than the previous week). Read more.
  • Goldman Sachs dials back Q4 GDP projections. The financial institution now predicts that U.S. economic growth in Q4 will be cut in half if a stimulus isn’t passed soon. This stimulus plan has dragged on quite a bit, and the uncertainty around it has had an effect investor and consumer sentiment, and now GDP forecasting. The biggest risk is disposable income reaching pre-pandemic levels, which leads to lower consumer spending. All around not good for the economy. Read more.
  • Home sales are skyrocketing in the U.S. The Census Bureau reported on Thursday that the rate of home sales had increased in August by 4.8%, bringing the annual rate to 1 million units. Read more.

Cereal With a Side of Saturday Morning Cartoons

General Mills is bringing back nostalgic cereal recipes to better appeal to millennialsThis includes fruit-shaped Trix (!!!!), real honey in Golden Grahams (what were they using before? ), and a more “chocolatey” Cocoa Puffs and Cookie Crisps. In other words, more real sugar. There is also a Saturday morning cartoons segment, hosted by none other than Saved by the Bell’s Mario Lopez. That’s not the only new cereal drop from General Mills – it is also releasing Elf-themed cereal just in time for the holidays. Move aside avo toast, cereal is cool again. 

It’s been a good week for General Mills. The stock had seen a healthy boost after reporting strong earnings. It also recently raised its dividends. Currently, the stock is positive on the year – nothing like Netflix levels – but still pretty good for a company that is trying to turn around the sharp decline that cereal consumption has seen over the years.

This isn’t the first time a brand has brought back nostalgic products in order to appeal to millennial-aged consumers. Lisa Frank was revitalized recently, thanks to Urban Outfitters. Nickelodeon launched NickRewind (FKA The ’90s Are All That), a programming block during Nick at Nite that features classic shows such as Rugrats, Hey Arnold!, Doug and Rockos Modern Life. There’s also Pokemon Go, a cutting edge way to use up your data plan weeks before your billing cycle ends.

Why does nostalgia work so well?
Nostalgia brings back positive memories. It reminds people of a time when they didn’t have to think about work, saving for retirement, those pesky student loans so many of us are trying to get rid of – adulting in general. It also might be good for you, too. According to a University of Southampton study, “nostalgia makes people more optimistic about the future and increases resilience.” Science Daily found that people are willing to spend more money when nostalgia is involved. If there was a cheat code for marketing effectively, it’s to tap into our emotions. Read more.

That you don’t need a job in order to have a 401(k)

TL;DR

401(k)s are employer-sponsored retirement accounts. Contributions into a 401(k) are made pre-tax, which means you pay income tax come retirement. The current IRS contribution cap is set at $19,500 for individuals under 50 and $26,000 for those over 50. These are often good for those who believe they will be in a lower income tax bracket come retirement.

There’s another type of 401(k), which is called a Roth 401(k). It’s similar to a 401(k), with two major changes: employers cannot contribute to these accounts; and funds are deposited post-tax. This means that qualified withdrawals are not taxed upon retirement.

Whether you’re a Wall Street Banker or the night janitor at Walmart, having a retirement plan in place is essential for ensuring your financial future. If you haven’t created a plan yet, doing so as soon as possible is the first step toward locking in security come retirement.

There are several types of retirement accounts available through employers and to individuals today. Some cater to specific classes of income, while others are solely available to nonprofit employees or public service workers. Due to the variety, many individuals maintain multiple retirement accounts to fully capitalize on their savings potential.

Some of the most common types of retirement accounts include:

  • 401(k) and related accounts
  • Roth 401(k)s
  • IRA variants
  • Roth IRAs

Each of these has its limitations, benefits, and tax consequences, depending on when you make contributions and withdrawals. Today, we’re going to focus on 401(k)s.

What’s a 401(k)

401(k)s are a type of defined contribution plan (a plan that involves regular contributions from an employee, employer, or both). These accounts are tax-advantaged, which means that they have special tax benefits.

Because 401(k)s are employer-sponsored accounts, both the employer and employee can contribute funds. The exact dollar amount is capped by the IRS, with the amount changing yearly to account for inflation.

In 2020, the IRS set annual employee contribution limits at:

  • $19,500 for workers under 50
  • $26,000 for workers over 50

For combined employee-employer contributions, or for employees who invest beyond the maximum tax deduction, the IRS set the limit at $57,000 (or $63,500 over 50). While employers are not required to match contributions, many include 401(k) matching in their employee benefits package.

401(k) match is when an employer agrees to match your 401(k) contributions up to a certain amount. For instance, if your employer offers a 100% match up to 3% of your salary, you should contribute that maximum 3% and get the most from your employer. 

It’s not always a 100% match up to a certain percentage per year. For example, it can be a 50% match up to 6% of your salary – which may seem like the same as a 100% match up to 3%, but is structured in a way that requires you to contribute a higher percentage in order to take advantage of the full match benefits. 

Tip: Look at the vesting schedule for matched contributions. Many employers require a certain number of years of service before the match is fully distributed into your retirement account. That means that while it may be accruing today, you may not be entitled to it should you leave before a certain amount of time. 

For example, if it takes 5 years to vest and you leave at the 4 year mark, your retirement plan is 80% vested. Depending on your employer, you could get only a portion of the matched contributions – sometimes none of it at all.

With any type of 401(k), it’s still up to the employees to select specific investments under their plan. However, the sponsoring company handpicks these investments first, which can limit your options. Most companies offer an assortment of securities, such as mutual funds, target-date funds, and even company stock in their benefits packages.

I don’t have a 401(k) – am I doomed?

Having a 401(k) is less common than you think. The U.S. Census Bureau found that only 33.6% of Americans have a 401(k). It’s worth noting that not all employers offer 401(k)s, and not all employees take advantage of it, especially if match isn’t offered. Fortunately, there’s another kind of 401(k) that isn’t offered exclusively by an employer. 

Traditional vs Roth 401(k)s


There are two main types of 401(k)s: traditional and Roth accounts. The primary difference between these accounts is how taxes are applied.

With a traditional 401(k), an employee deposits pre-tax funds into the account. The employee can then write this amount off on their tax return, which lowers their adjusted gross income for the year and may even push them into a lower tax bracket.

However, when it comes time to take a withdrawal, the government levies income taxes at the employee’s current tax bracket on every paycheck. This income tax also applies to any interest earned in the account.

On the other hand, employees who use a Roth 401(k) deposit funds post-tax, which means that qualified withdrawals – and the interest earned on the account – come out tax-free come retirement. However, because the individual pays taxes before contributing toward the account, these funds can’t be written off on a tax return.

An employee may utilize both types of accounts to capitalize on their benefits. 

However, only employees may contribute to a Roth 401(k), whereas employers can also contribute to a traditional 401(k). Furthermore, contributions to both accounts cannot exceed the annual limit set by the IRS. (As a reminder, that amount is $19,500 in 2020).

Withdrawals


Withdrawal requirements for 401(k)s are fairly strict to ensure the money stays put until it’s needed (and the federal government gets their cut). Those who don’t meet special criteria – such as a permanent disability – will be charged a 10% early-withdrawal penalty on top of applicable taxes for removing funds before the age of 59½. 

Furthermore, both traditional and Roth 401(k)s have RMDs, or required minimum distributions. This means that, beginning at age 72 (as of 2020), the account holder is required to take out a minimum payment from their 401(k), whether or not they need or want the money.

Individuals who still work for the company holding their 401(k) are exempt from RMDs. Additionally, you can avoid RMDs by rolling your account into a Roth IRA, although there are restrictions, fees, and legal concerns that come with this move.

Which 401(k) Plan is Better?


Generally speaking, a Roth 401(k) is best for workers who expect to be in a higher tax bracket come retirement. This allows individuals to avoid paying higher income taxes on withdrawals. Young workers and those making their way up a corporate ladder fall into this category.

Conversely, those who may be in a lower tax bracket come retirement may see more benefits from a traditional 401(k). This allows them to take a tax break on their income now and pay lower income taxes on withdrawals later.

It’s also worth noting that 401(k) contributions are invested into various funds to grow, but the interest earned and withdrawn in a Roth won’t be taxed. However, with a traditional 401(k) account, any interest on invested funds is subject to the same income tax as the original contributions. This means that investing in a Roth 401(k) at a young age can be more valuable over time than investing in solely a traditional 401(k).

The biggest difference between these types of accounts is where they originate and how much you can contribute. 401(k)s are specifically employer-sponsored accounts, whereas IRAs are the sole responsibility of individuals.

Employer-sponsored accounts have much bigger contribution limits compared to IRAs. Additionally, many employers match contributions, which means that you’re earning extra income toward your retirement without the temptation of those funds showing up on your paycheck. (In other words, you and your employer share the burden of investing in your future plans).

With a 401(k), your investment options are limited based on which accounts your employer prefers. With an IRA, on the other hand, you can choose almost limitless investment options to suit your needs. However, generally speaking, financial advisors recommend that individuals who receive a company match into their 401(k) max out these contributions first.

Never without risk

A 401(k) is an investment vehicle, meaning that there is always a certain amount of risk involved. Although a 401(k) has better returns that what you’d get from the interest accrued from a traditional savings account, there will be fluctuations that coincide with market movements.

Take the market crash that occurred earlier this year. In the wake of a recession that we are unfortunately very much still in, people weren’t just losing their jobs – they were also losing part of their retirement. And in many cases, employees who were laid off lost out on the opportunity for their employer match to fully vest. It was total chaos. That’s why it’s important to treat your retirement account(s) like you would your investment portfolio for stocks, ETFs, bonds, etc. (Diversify!!)

The Bottom Line?


Saving for retirement is more than throwing your money into a bank account and calling it a day. Whether you decide to focus on maximizing employer contributions or a achieving a higher return on investment, having a 401(k) is an effective way to put money away for the future. Don’t play yourself. Retirement is no joke.

Keep in mind that 401(k)s are not the only investment vehicle available. That’s why we recommend saving for retirement in general. It’s up to you.

Throw away everything we said about 401(k)s! Just kidding. But, really though, it’s important to know that having a 401(k) is one of several ways to save for retirement. And it shouldn’t be the only way someone should choose to save for retirement, given they decide to opt in for one. Technically, Adam Ruins Everything doesn’t “ruin” 401(k)s in this video; however, he sheds a really good point about what it is intended for, and how we can maximize our retirement savings.