National 401k Day: My Tips on how to install a successful 401k plan

Tomorrow is National 401k Day, and I want to inform my followers about the importance of planning for retirement.

First of all, a 401k is a Defined Contribution Plan, which means the investment risk is all on the shoulders of the employee, so in effect, you are your own Chief Investment Officer. I recommend pairing yourself with a financial advisor if you are reluctant to choose a proper asset allocation. A good alternative is to invest in Target Date Funds. Many employers offer them, and you can select them based on the year you retire. For instance, if you plan to retire in 2045, you can choose the 2045 target date fund. The beauty of these funds is that they rebalance your portfolio out of stocks and into bonds as you get closer to retirement.

Another risk that employees have to manage with DC plans is "Longevity Risk." This means the risk that they could outlive their assets in retirement.

401k accounts are tax-deferred, meaning your investments grow tax-free until you retire. During your accumulation period, you can rebalance your 401k portfolio, incurring no capital gain tax, and your dividends are not taxed. When you combine these tax benefits throughout your working life, we are talking about thousands of dollars saved.

Here below the 2024 401k contribution limits:

• Employee Contribution Limit: $23,000, up from $22,500 in 2023.
• Catch-Up Contribution Limit?(for those aged 50 and older): $7,500, making the total limit $30,5001

Remember also that many companies match your contribution to your 401k. On average, companies match your contribution dollar for dollar up to 3 to 4 percent.

Here's another tip. If your company offers an HSA Account, you can use it as an additional retirement fund. Many HSA providers provide investment options, allowing you to grow your savings over time. The contribution limit for this year is 8,300 dollars.

• Pre-tax Contributions: Money you contribute to an HSA is not subject to federal income tax.
• Tax-free Growth: Earnings on the money in your HSA grow tax-free.
• Retirement Savings: After age 65, you can use HSA funds for non-medical expenses without a penalty, though you will pay income tax on those withdrawals.

Maximizing your contributions to your 401k and HSA Accounts will put you in a great position to accumulate wealth for retirement.

Decumulation Strategy: The Achille's Hell of 401Ks

The US Legislator has done an excellent job of giving employees the tools to accumulate wealth. However, if you diligently set money aside during your working career, you have solved half of the problem. As I pointed out, you will have to manage your longevity risk during retirement carefully. So, what is called the "Decumulation Strategy" is as essential as your accumulation strategy.

What needs to be added in many 401k plans is to guide the investor in the decumulation process. Consider annuities if you want to avoid the risk of outliving your 401k balance. I will focus here, in particular, on one type of annuity called "Fixed-Immediate-Annuity ."When you retire, you can convert your 401k balance into an annuity that will pay you a fixed income until you die. There are risks in buying an annuity, like the risk that higher-than-expected inflation could erode your purchasing power. However, for many of us, using an annuity to cover at least our expected spending on non-discretionary items is a good idea.

To conclude, before buying a fancy car, focus on maximizing your 401k and HSA accounts and paying your debts!