Posts Tagged ‘401-k facts’

401-K Rollovers, How do Millionaire Nurses Do It?

Wednesday, February 17th, 2010

A 401-K rollover, is not an exercise like P-90X and it is not another futuristic movie title.  A401-K rollover is what you  do with your company retirement money, when you leave your current job.

Let’s say you have been working at hospital A for twenty years, and have built up a significant amount of money in your 401-K (or 403-B).   Now you have been offered a big promotion and raise to work for hospital B.

What do you do with your money?  Well, it depends on tons of factors, but lets work through a few of them.

  • Your plan at your old company may require you to move your money-most don’t unless it’s less than $5,000.
  • If you think the old plan is great, and the hospital is stable, you can leave it there-be sure to keep up with it, with change of address notifications, if you move.  You don’t want to lose touch with your money!!
  • If you want to move the money, then you need to do a “Rollover”.

So what are your “rollover” choices:

  • Have your money “transferred to your new employer.  Make sure you like the options in your new employers retirement accounts-if not keep reading.
  • Rollover the money into a traditional  IRA-either with a brokerage, or a mutual fund company.
  • Rollover the money into a Roth IRA.
  • Let them send you a check for the money-go have a big party, buy a new car, new clothes and Jimmy Choo’s!

All of the above are fine except the last one!  If you take the money and run, your old employer is required to send 20% of the money to the feds for taxes, as they consider this income, and if you are under 59 1/2 they also slap you with a 10% penalty (yes that money is gone) for being stupid!!!!

As to whether to choose a traditional IRA or Roth IRA depends.  The advantage of the Roth is that your money when you withdraw it, is tax free.  When you withdraw money from a traditional IRA, you pay taxes on the money at whatever rate applies-IF that is very little money, and your income is low, then the taxes may be low.

However, if you spend the next 40 years learning to act and then become a “Millionaire Nurse” then those taxes may be significant.  So, if you can afford to pay the taxes on the money now, then conversion to a Roth IRA, I think, is the best decision.   Now companies that manage Roth IRA’s, have calculators that you can play with to help with the decision.  And you can do both, have part put into a traditional and part a Roth.

But you still are having to “guess” at what you tax rate will be when you retire.  And I can only guarantee one thing-the odds of any of us “guessing” correctly is near zero!!!  So as I have said before, don’t have paralaysis by analysis, do your best due diligence and homework, then push the damn button!  EXECUTE!!! (sorry, but sometime you have to get people’s attention.)

Now to discuss all the implications of buying stocks, mutual funds, and deciding how to invest in your new IRA Rollover is worthy of a book, or at least several posts here-so we will deal with that in the future… I know, you can’t wait!!!

Now, as to how to actually arrange the transfer, you have to be proactive.  Call your benefits people at your old employer, and ask them what paper work you need to fill out to move your money.  Ask the people that you are moving the money to, what paperwork you will need to fill out, so they can accept the money,-without it disappearing in cyberspace…. So make sure both ends are covered.

If you aren’t sure if you have filled out the forms correctly ask for help-if you can’t get any one to help, then maybe you need your new financial company/brokerage folks to help, or even get an independent financial advisor to do so, and pay them their hourly rate for assistance.  Just keep bothering people on both sides  of the transaction till it gets done!!!

So let me know your questions or comments. There are plenty of exceptions to the above rules-special circumstances for withdrawal without taxes or penalties, such as disability, etc.  So, keep that in mind.

There will always be unusual exceptions.  Like the old saying in medicine-when you hear hoof beats, don’t expect to see zebras-but every now and then, a zebra will show up and bite you on your “donkey”….

If you have done a “rollover” let us know how hard or simple it was.  What was your experience?

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Posted in Personal Finance 101, Retirement savings, Wealth building | 8 Comments »

Bond Funds: 401-K Investing for Millionaire Nurses-Continued

Wednesday, February 10th, 2010

I want to continue my 401-K investing course for nurses-and whoever else reads today- by focusing on Bond Mutual Funds.    I have received a few comments, that some don’t understand this investing stuff.

The only way to understand anything, is first to decide it is important.

If being financially solvent when you retire is not important to you, then you need to wake up, and smell the Narcan!

If I am unable to explain it in an understandable manner-then please ask questions.  Remember, the first time someone talked about anaerobic bacteria, you looked at them and said, “Do What?”  So keep reading, and little by little, these terms will gradually mean more to you.

I want to discuss Bond mutual funds today.  Bonds are a term used when corporations borrow money, and promise to pay the money back, over a period of time, with a certain interest rate.  Bond’s can be long term-15-30 years, intermediate, 5-15 years, and short-term-less than 5 years.

Now interest rates tend to be higher, the longer term the bonds. Because the risk something could happen to the company over 30 years is higher than something happening over 5 years-so companies have to pay you more to take that greater risk.  Therefore the interest rate paid on long term bonds is higher.

Now most 401-k plans, don’t have individual company bonds for you to invest in. They usually have a mutual fund that holds a bunch of bonds.  Now, in the past, bond mutual funds, were thought to be more conservative or safer than stocks.  That is, until, a bunch of companies go bankrupt-and bondholders lose usually all of their money.

But a mutual fund  may be holding hundreds of different companies bond, it is unlikely you will lose all your money.  However bond mutual funds are subject to what is called interest rate risk.  This means, that if interest rate rise higher than what the bonds rate was when it was sold, it goes down in value.

If you are holding the bond till its maturity date-which means 30 years if it is a thirty year bond-you are guaranteed the rate it was sold at-so you will have that return on your money.

However, many mutual funds “trade” bonds, this means they sell them to other companies/funds/individuals for the going rate, betting the interest rates will change for the better (for them).  Check out this article on bond funds.

So, this matters to you why????

Well, picking the right bond mutual fund, is important, because some managers do better at the choosing/trading than others.

So when you have a choice between several bond funds, what do you do?  I would look up the fund on Morningstar.com or some other financial website and look at the long-term track record of that fund, compared to its competition.   If it rates high, go for it.  If it rates at the bottom, check out your other options, and pick the best rated one you can.

Many 401-k plans don’t have pure bond funds.  They have funds that are mixed with stocks holdings and bond holdings.  These are good funds, if you don’t want to have to think.

In general, if you are going to use one of these blended funds, the older you are- the higher the bond holdings should be, over the stock portion.

In other words, if you are just 20-you may want 80-90% stock and 10-20% bonds, then when you are 60 just the opposite.  This is because, in general bond funds are less likely to drop as low, in value, in bad times.  So that means less risk- not no risk, just less risk.  But, most experts recommend always keeping some of your retirement holdings in stock, because you need the growth potential-especially if you end up living to age 90 and above, (the chances of which, increase every year!).

When you are older, you don’t have as much time for the stock portion of the fund, to bounce back from it’s losses before you may need the money.  So you decrease your exposure to stocks as you get older, not eliminate, just decrease.

You don’t want to plan to travel in retirement, to find you can only afford to drive to the mailbox-to see how bad your stocks are doing.

So this is the end of our latest version of 401-K 101.  I hope you have enjoyed the show, I mean, post.  Really, I just hope you managed to read this far-only weird people like me like to read about this stuff.

So go forth, and scare the bejesus out of your benefits administrator the next time you get your 401-k report. Ask questions and make good  thought through decisions, rather than just closing your eyes, and picking.

We will continue this discussion another day, after you have had some coffee/tea/Red Bull.

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Posted in Personal Finance 101, Retirement savings, Uncategorized | No Comments »

401-K Class 101-For Millionaire Nurses-Continued!

Tuesday, February 2nd, 2010

This is the third edition of 401-K class for nurses, (and whoever else may be snooping-thanks for snooping!).  Now I know you would rather read about fun stuff-you would rather watch American Idol, Dancing with the Stars, or whatever your favorite program is, than read about boring 401-K stuff-but let me ask you a couple of questions:

  • Do you think Simon Cowell is going to be there for you when you want to retire???
  • Do you think NBC or CBS and their advertisers care whether you spend your retirement time watching a 52 inch HDTV, in your paid for house with no debts,  or watching the 12 inch tv with rabbbit ears down at the homeless shelter????
  • Do you think your kids are going to spring for your world travels when you retire from 40 years working the night shift in the ER????

No, I didn’t think so, so keep reading-or go continue to be stupid, and not pay attention to this till it is too late-YOU HAVE A CHOICE!!!!!

I want to discuss ACTIVELY managed mutual funds this week, after discussing index funds in our last class.

Actively managed funds, are just as described, they are managed by a person or group that makes investment decisions on which stocks to purchase.

One of the most famous fund managers/ funds, when you read about this in investing books,  is Peter Lynch, a past manager of Magellan-a Fidelity Mutual Fund.This fund had stellar returns during his management-that some would say has suffered since his retirement.  This has become the “poster child” for avoiding single manager funds.

When he or she retires, or is hired by another company for a huge raise, then where will your fund be?

Now, manager choice may  matter a lot when you are doing your own investing, but frequently in 401-K’s, the choice of funds available  are limited, in number and type,  to just a few funds.

So you may not be able to choose between a single or group manager. But I think it matters to at least know this information.

You can usually look this info up for free, by joining “Morningstar” or some other investment information site.  You give them info about yourself, to sign up, and then you are able to look up funds, and get other information-that for the most part is not slanted towards any one fund company.

You can also find out about the fund in your “prospectus”. This is the document that you get at least once a year in the mail from the fund company that you own in your 401-k.  It probably goes in the “circular file”-if you are like most nurses.  Next time you get one,think of me, and at least read the page that describes the type of fund, look at the list of stocks in their fund holdings, and read the paragraph or two from the fund manager about the past year’s results.

Now the next step, as mentioned above is finding the type  fund, you are currently investing.  The different types are numerous and somewhat complicated- mainly because the fund companies try to have a product for everyone’s needs.

They then end up with so many different funds-no one knows what is going on.  But here is a list of several common “actively managed” funds you may find in your 401-k and a little about them.

  • Growth funds-consists of companies expected to “grow” or increase in value faster than the market.
  • Value funds-consists of companies that the fund manager thinks are bargains-(cost less than the stock is worth).
  • Income funds-consists of stocks that pay dividends-this means they pay a percentage of the value of the stock quarterly to stock-holders instead of keeping profits in the company.  Some feel this results in less volatility (rapid rise and  fall in stock prices).
  • Balanced funds-funds that may hold growth and income stocks- (some balanced funds also hold bonds, we will discuss bonds and bond funds in another post).

I found this list of mutual fund terms on the Securities and Exchange Commission website.  * Glossary of Key Mutual Fund Terms.

So, we come to the end of another exciting version of 401-k class for “Millionaire Nurses“PS

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