WHETHER THROUGH INERTIA OR TREPIDATION, investors who put off important investment decisions might consider the admonition offered by motivational speaker Brian Tracy, “Almost any decision is better than no decision at all.”
Investment inaction is played out in many ways, often silently, invisibly, and with potential consequence to an individual’s future financial security.
Let’s review some of the forms this takes.
Your 401(k) plan
Some of the following are impacts of a decision not to enroll. Not only do non-participants sacrifice one of the ways to save for their eventual retirement, but they also forfeit the money from any potential matching contributions their employer may offer. Not participating may be a costly non-decision one can make.
The other way individuals let indecision impact their future is by not selecting the investments for the contributions they make to the 401(k) plan. When a participant fails to make an investment selection, the plan will have provisions for automatically investing that money. And that investment selection may or may not be consistent with the individual’s time horizon, risk tolerance, and goals.
Most distributions from 401(k) plans and most other employer-sponsored retirement plans are designed to be taxed as ordinary income. If taken before age 59½, you may be subject to a 10% federal income tax penalty. Because payments received from your 401(k) account are considered income and taxed at the federal level, you must also pay state income taxes on the funds. The only exception occurs in states without an income tax. Your 401(k) plan may offer you the opportunity to have taxes automatically withheld from a withdrawal. If you live in a county or city that levies a local tax on income, your withdrawal from a 401(k) plan is subject to taxation at the local tax rate as well. Many local income tax districts have their taxes collected when you file a state income tax return, so you may not have to file an additional return to pay this tax. Generally, once you reach age 70½, you must begin taking required minimum distributions. The 10% early withdrawal penalty may be avoided in the event of death or disability.
Non-retirement plan investments
For homeowners, “stuff” just seems to accumulate over time. The same may be true for investors. Some buy investments based on articles they have read or on a recommendation from a family member. Others may have investments held in a previous employer’s 401(k) plan.
Over time, one may end up with a collection of investments that may no longer align with their investment objectives. Because the markets are dynamic, an investment that made sense yesterday might no longer make sense today.
By periodically reviewing what they own, investors can determine whether their portfolio reflects their current investment objectives. If they find discrepancies, they are able to make changes that could benefit their financial future.
Whatever your situation, retirement investments require careful attention and could benefit from deliberate, thoughtful decision making. Your retired self may one day be grateful that you invested the necessary time to make informed decisions today.
Please call 419-872-0204 for a complimentary consultation to review your individual situation.
Citizen Advisory Group is a comprehensive financial services firm that helps Northwest Ohio and Southeast Michigan’s soon-to-be-retired and retired residents effectively plan for and prepare for life’s greatest journey. In addition to helping clients with their finances, Citizen Advisory Group offers monthly health and wellness events. Investment advisory and financial planning services offered through Advisory Alpha, LLC, a Registered Investment Advisor. Insurance, Consulting, and Education services offered through Citizen Advisory Group. Citizen Advisory Group is a separate and unaffiliated entity from Advisory Alpha.
While tax and legal issues may be discussed in the general course of financial and investment planning, Advisory Alpha does not provide tax or legal advice. Please consult with your tax or legal professional prior to making decisions relative to these issues.
